1031 exchanges enable you to reduce or eliminate taxes on the sale of business or investment real estate. If you want to sell one business or investment property (the “relinquished property”) and purchase a “like-kind” replacement property within 180 days of the sale, structuring these two transactions as a 1031 exchange can enable you to avoid capital gains tax and depreciation recapture tax. Using a qualified intermediary (QI) converts the sale and the purchase into an exchange and creates the opportunity for tax deferral.
The question is — If you want to do a 1031 exchange, when during this process should you contact a 1031 QI?
The simple answer is that you must enlist the services of a 1031 QI before you sell the relinquished property (or before you buy the replacement property, in the case of a reverse exchange.)
It’s important to remember that once the relinquished property is sold and you (the seller) are in receipt of the proceeds, the opportunity to do a 1031 exchange is completely lost. Instead, when you contact a 1031 QI before selling your property, you and the QI enter into an exchange agreement and set up a qualified escrow account at a secure bank to hold the sales proceeds of your property. Upon the sale of the relinquished property, the sales proceeds are wired to the qualified escrow account, which allows distributions only when authorized by both the exchanger and the QI. The funds are held in escrow until they are disbursed to buy the replacement property.
But what if you want to purchase a replacement property first, before selling your current property? This is possible — the IRS has issued guidance to provide “safe harbors” that enable exchangers to structure 1031 exchanges this way — but once again the services of a QI will be required before you purchase the replacement property to maintain eligibility.
The bottom line is this: contacting a 1031 QI early in the process will maximize your eligibility to receive the tax benefits a 1031 exchange can provide. And furthermore, it’s in your interest to work with a 1031 QI that embraces industry-leading best practices and controls.
* * *
What can we help you exchange?
At NES Financial, we’ve put together an industry-leading track record of 1031 success, across tens of thousands of transactions and more than 25 years in the business. Our general counsel developed significant 1031 guidance while working at the IRS National Office. And we’ve built a cutting-edge administration platform, called eSTAC®, from the ground up to maximize your transaction security and transparency.
If you’d like to learn more information about our 1031 QI services, please don’t hesitate to contact us.