Our Complete Guide to 1031 Exchange Companies

A Key in a Hand

Are you in the business of buying and selling properties for a profit? It’d help if you understood that you’d be remitting a percentage as capital gains tax back to the state as you make profits. This tax payment may be a hindering factor, considering the values of these properties, especially an apartment building decline as time goes.

You can legally pass on paying these capital gains taxes by directly using the gains to purchase another property through the 1031 exchange services.

Think of the 1031 exchange this way. You’re getting the capital gains possible on all investment properties. This process could become complicated if you don’t have a detailed guide with specialized expertise in the 1031 exchange services.

This is where you need a 1031 exchange company with strong ties in property investment. Let’s start with the basics and see what the 1031 exchange means.

What Is a 1031 Exchange?

1031 exchange is coined from the U.S Internal Revenue Code, section 1031, which allows a real estate investor to not pay capital gains taxes after the sale of an investment property but rather reinvest the total proceeds into the purchase of another property.

This process isn’t stealing tax dollars but rather putting them into promising ventures that will help develop the economy, like investment properties. Most real estate investors know that strategic property exchanges, such as the 1031 exchange, can help them expand their portfolios and improve their net worth more quickly and efficiently

When you sell an investment property, you’ll almost always be required to pay capital gains tax on the profits. A 1031 exchange is useful in these kinds of exchange transactions because it allows you to defer your capital gains tax liability and save tax dollars.

When Do You Need a 1031 Exchange?

As an investor, there are situations you should consider using 1031 exchange services for in your next property sale. It could be a lifesaver to help you invest in that next big real estate project.

You may not understand, but paying taxes with the sale proceeds of an investment property might reduce the amount you need to pump into your next project. These reduced funds could make you lose a valuable deal, trying to recoup funds for reinvestment. 

You may want to invest in a real estate project managed by a firm or asset management company. It could take away the stress of buying an investment property where you have to work it alone, dealing with the recurrent bills on the property.

If you’re looking to diversify your investment portfolio on real estate. 1031 exchange services can help you get more significant properties when you get the necessary consultation and advice before proceeding.

What’s more? It creates space for the unification of many properties into one major real estate project. 1031 exchange services also reduce the depreciation time and value for an investment property. Using 1031 exchange services can help you reduce depreciation costs, especially on properties that have stayed long enough and are beginning to show signs of degradation.

While these reasons aren’t exhaustible, using a 1031 exchange format for the next time you want to sell and buy properties has lots of economic benefits.

While it’s a civic duty to pay your capital gains taxes, it could stop you from going for higher-value properties, making you a much bigger employer of labor. 

Does My Property Qualify?

People are talking

Now that you have an idea of what a 1031 exchange is and its enormous benefits to you, the next question you should consider is if your property qualifies to be sold under a 1031 exchange. 

Properties that are eligible for a 1031 exchange depend on many factors. These factors exist because the legislation behind the entire 1031 exchange services process still has grey areas. 

The first factor that qualifies a property is that it must be a business property. If your investment property is used for trade or any business, you can present it for consideration. 

The second, and possibly most important, factor for determining if your property qualifies is whether both the sold and the to-be-purchased properties share the same structures and similarities.

Here’s what section 1031 of the Internal Revenue Code has to say:

“Both properties must be similar enough to qualify as ‘like-kind.’ like-kind property is property of the same nature, character, or class. Quality or grade doesn’t matter. Most real estate will be like-kind to other real estate. 

For example, a residential rental house improved real property is like-kind to vacant land. One exception is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like-kind to land.”

This concept might be complicated to understand. Why struggle to know when you have a competent 1031 exchange company willing to help you out. Many top investors fall into the trap of the grey areas caused by this code.  

Are There Time Requirements for Exchange?

Yes, there are time requirements attached to using the 1031 exchange services. Two-timing rules are essential if the 1031 exchange can work for you. They’re:

  • The 45-Day requirement relates to identifying and assigning a property as a replacement. As soon as you sell the property, the 45 days start counting from the day of sale. The IRS code says you must present an eligible property as a possible replacement. 
  • The 180-Day requirement, which is slated only for all matters related to separate closing on the replacement investment property. After getting a seller, only 180 days are given to settle and hand over.
  • Certain situations arise where the deal may become hooked halfway, and reverse exchanges start to be the best way out.

What Is Reverse Exchange Services?

A reverse exchange is a property transaction in which another property is purchased without the sale of an existing one. Unlike delayed exchanges, reverse exchanges require a second property to be purchased after the existing one is sold.

1031 Exchange Steps

The first and most important step is getting a qualified intermediary to handle the exchange for you. A rule when choosing the intermediary is ensuring they’re a complete third-party with no ties to you or a potential seller.

Selling the Property

When selling a property, you must bring in a qualified intermediary to start the process for you. The only thing you’re allowed to do is introduce a buyer to the intermediary and let them oversee the process.

When it’s time to exchange funds, make sure the funds are transferred to the intermediary or qualified escrow account, but never to you. You risk forfeiting the entire process if the transfer is made to your account and not the third party overseeing the process.

Identifying a Replacement Property

Getting a replacement property has a base guideline you must follow. This guideline is based on the like-kind exchange rule stated by the IRS rule. The proposed property should have the same value as the property sold for the best results. 

Additionally, your choice replacement property should have similar characteristics; a commercial division property can be exchanged for industrial property, and a residential rental property exchanged for barren land. 

You can’t exchange an empty land for artwork.

Purchasing a Replacement Property

After agreeing on the price of investment property, the intermediary will produce a sale agreement. The agreement will contain a signed consent that you’re willing to use the intermediary to facilitate the exchange, and the seller accepts payment through the intermediary. 

1031 Exchange Rules That You Need to Know 

Shaking Hands and House on the background

As stated that a 1031 exchange must occur within 180 days, three critical rules guide the 1031 exchange commonly applied to identifying and naming a potential replacement property. 

  • The 3-Property Rule

The 3-property rule requires or allows you the liberty of naming up to three properties as replacement material. You can do this not considering the current value of the real property. 

  • The 200% Rule

With this rule, you can name as many properties as possible of like-kind as potential replacements. However, all the properties must not have a cumulative value of more than 200% compared to your property sold. 

  • The 95% Rule

This rule states all the replacement investment properties named must have a total value of 95% compared to the final property bought, especially as there may be lots of like-kind exchanges involved. 

What to Look for in a 1031 Exchange Partner

The 1031 exchange process can be brutal and intensive. Even though it may seem easy, very few understand the strategies to help you navigate through the entire process and come out with a new property after selling off your former. Thus, you need an exchange partner. This partner will be your qualified intermediary from start to finish.

The following are tips to help you know the right partner for a 1031 exchange:

  • When using 1031 exchange services, there are many moving parts, and everyone must move together in the same direction for the exchange to happen successfully. A reliable 1031 partner must agree to work with an agent, finance manager, and attorney. Don’t consider a partner who wants to bring on a team of such professionals and neglect your own. This arrangement could cause a conflict of interest, which is not what you need. 
  • The partner should create a plan that favors you, the seller of the choice property, and is still within the legality of section 1031 of the IRS code.
  • The 1031 exchange planner should have strong credibility and reputation with previous success stories to their name. As stated, the entire process is rigorous and needs someone with experience and expertise to start and finish the job perfectly for you.
  • Such a partner is well-versed in the entire process, from the timing to rules. It’d help if you went for the partner to enlighten you on the following steps and provide strategic consultations on what to do next. 
  • The delayed exchange fees are affordable for services offered and help you save tax dollars for more productive economic gains.

What are 1031 Exchange Companies?

1031 exchange companies are firms directly in charge of processing a 1031 exchange between buyers and sellers. These companies act as qualified intermediaries for you.

The tax code forbids the following people from acting as a 1031 exchange company for you: an attorney or agent you have known and worked with for up to two years, family members, or a friend.

Some local and national banks may serve as a 1031 exchange company.

Finding the Right 1031 Exchange Company: Important Steps

Many 1031 exchange companies in the market today seek to offer their services. However, not all can help you achieve your plan. There are steps to take to ensure you hire only the best firm. They include:

  • Ask for referrals from family and friends. A personal recommendation is far better than depending on any online platform for information.
  • Research on potential companies. A few factors should be considered if the company is available nationwide and insured with a fidelity bond and no history of fraud with client funds.
  • They should have a history of known successes of the 1031 exchange recorded with the local IRS office.

The Best 3 1031 Exchange Companies

House In Hands

As an investor, using the best American exchange company to maximize your investment in real properties should be your top priority. Generally, using an American exchange company will help you avoid any costly mistakes.

So, here’s a quick review of some of the most reputable exchange companies: 

NNN Deal Finder is a reputable exchange company that offers investors a reliable way to invest in properties and make passive income monthly. 

Besides helping you find the most sought-after triple net properties for sale, NNN Deal Finder acts as an intermediary and exchange company to guide you through your 1031 exchange process to ensure a successful transaction. 

Pros:

  • Easily helps to locate like-kind properties 
  • Extensive NNN listings 
  • Excellent customer service 
  • Exchange services across the U.S

Cons:

  • More focus on triple net properties over other investment options
  • First American Exchange Company- Best Value

First American Exchange Company is one of the most popular 1031 exchange services in the country.  As a qualified intermediary, First American Exchange Company is known for its trustworthiness, financial stability, quick processing, convenience, and proven track record.

First American Exchange Company offers everything an investor needs at a fair price, which is why it made our list. In addition to its top-notch exchange services, First American also offers title insurance and full settlement services for mortgage companies and property investors.

Pros:

  • Solid track record and a strong reputation
  • Backed by the financial strength of one of the largest title companies across the country
  • Exchange experts located in most states

Cons:

  • Security measures aren’t the strongest
  • Exeter Exchange Services

Exeter had structured its company and resources to accommodate more complex exchanges like reverse and improvement exchanges. Exeter formed several subsidiary companies to facilitate its more complex transactions, ensuring more efficiency and security for its clients’ funds.

Pros:

  • Expertise and structure to handle most complex transactions
  • Money-back guarantee
  • 24/7 access to exchange coordinators
  • accommodates reverse and improvement exchanges

Cons:

  • Locations in western U.S. only

Frequently Asked Questions (FAQs)

What is a like-kind exchange?

A like-kind exchange, also known as a 1031 exchange, is a single transaction or series of transactions that allows you to sell one asset and buy another without incurring a current tax liability on the sale of the first asset.

Do I need the services of a Better Business Bureau when buying a property?

If you’re hoping to close a big property deal without any hassles then yes. Staff at the Bureau are in charge of managing national contracts for title services and closing services. It also deals with consumer complaints about businesses and provides advice to companies on how to conduct business properly.

What is a flat fee structure?

A flat fee is a set amount that a client pays rather than a percentage-based commission. Flat fees are imposed by property brokers when listing and selling properties. The term is commonly used to refer to the flat fees imposed by property brokers when listing and selling properties.

Need More Information? Ask Us Today – It’s FREE!

There are so many details about the entire 1031 exchange services process. As you’ve learned, It’s a valuable means of getting more cash for your next project, but it could be unclear if you’re a newbie trying to understand the concept. 

We can help you answer all the burning questions you have about the 1031 exchange. All you need to do is send a message, and we will be glad to help you out. Get relevant information on making this process work well for you, including suggesting a reputable, qualified intermediary.

Contact Us Today!

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