1031 Exchange Coordination & Oversight by Compass 

What Is a 1031 Exchange?

A 1031 Exchange — also referred to as a “like-kind exchange” or “Starker exchange” — is a powerful tax-deferral strategy that allows real estate investors to sell an investment property and reinvest the proceeds into another qualifying asset, deferring capital gains taxes, depreciation recapture, net investment income taxes, and state taxes that would otherwise be due upon the sale. 

Born with The Revenue Act of 1921, the 1031 Exchange has become one of the most vital tools in commercial real estate investment strategy — enabling investors to reallocate capital efficiently, build wealth, and optimize their portfolios without triggering an immediate tax liability. 

How a 1031 Exchange Works

The most common structure is a forward exchange, where the investor sells the relinquished property and then acquires a replacement property within a defined timeframe. A Qualified Intermediary (QI) — an independent third-party exchange company — holds the sale proceeds between transactions and facilitates the exchange process.

The “like-kind” parameters are broadly flexible. A retail shopping center can be exchanged for land, or a warehouse property can be exchanged for a multifamily asset. Any commercial or investment property may generally be exchanged for any other, as long as the replacement property is not used for the personal use of the exchanger.

Key 1031 Exchange Timelines 

At closingExchange must be set up at or before closing on the relinquished property. The QI retains all proceeds — the exchanger cannot receive them.

45 daysThe exchanger must identify the replacement property by providing the QI with addresses or descriptions of contemplated properties.

180 daysThe exchanger must close on the replacement property within 180 days of the relinquished property sale. This period may be shortened if the exchanger’s tax return falls within the window — unless a tax extension is filed.

1031 Exchange coordination and oversight services for real estate investors by Compass Commercial

Compass Commercial’s 1031 Exchange Oversight

The GoCommercial team at Compass has facilitated hundreds of successful 1031 Exchange transactions for clients throughout the country and across all types and classes of investment property. Our experts are adept and well-versed in every aspect of the process — from strategy development to transactional execution. 

We work hand-in-hand with clients to customize an effective exchange strategy by focusing on increased asset valuation, establishing stress-free exchange milestones, and executing all standard transactional requirements to defer tax liability. The effective reallocation of investment assets requires expert broker assistance — and that is exactly what we provide.

For official IRS guidance on like-kind exchanges, visit IRS Like-Kind Exchange Tax Tips — the authoritative source for federal tax rules governing 1031 transactions.

Ready to Start Your 1031 Exchange? 

Contact Compass Commercial today to discuss your potential exchange strategy and learn how our team can help you defer taxes, reallocate capital, and maximize the value of your investment portfolio. Talk to a Compass 1031 Exchange specialist today.

FAQs

A property owner should consider utilizing a 1031 Exchange to defer tax liability if he or she is interested in: Liquidating a non-performing or underperforming real estate asset to replace with a higher yielding asset or a property with higher cash flows. Diversifying a strategic real estate portfolio across various asset classes and/or geographic regions. Upgrading multiple small assets with a larger single real estate asset that can be professionally managed or overseen with less overall management burden. Spreading risk across multiple assets for estate planning or eventual liquidation of real estate assets. Transitioning into more commercial-oriented assets from residential income properties. Strategically deferring increased tax liabilities stemming from depreciation recapture. Selling any real estate at an above-market price point while preserving cash flow and avoiding an immediate tax burden.
Technically, the IRS requires a “continuation of ownership” to preserve the tax deferment offered by a 1031 Exchange. However, continued ownership can often qualify as a participant or minority partner in a more considerable real estate investment. The seller may also form direct subsidiaries for ownership of any new asset. For example, if you are selling a rental house that is titled in your personal name, the new property will need to be wholly owned by you or an entity that you hold in its entirety.
Stock in trade is real estate that is owned primarily for the purposes of resale by the owner. Stock in trade real estate may include residential assets built for sale by a developer or a house that is being fixed up and resold as a “flip .”Stock in trade also refers to wholesalers who assign a purchase and sale contract to another buyer. Generally, three distinct requirements are assessed to qualify Stock in Trade: How long did the seller hold the real estate? What was the reason that the seller originally purchased the property? What is the primary use or business of the new Buyer?
A “boot” is created when the relinquished property is sold for an amount greater than the total cost of the replacement property. The difference in the two sales prices is referred to as a “boot”, and capital gains taxes must be paid on any amount left in the boot.
Any property with an existing mortgage balance can be relinquished and exchanged for a new property. To completely defer tax liability, the mortgage amount on the new property should be equal to or greater than the principal balance owed on the relinquished property.
Sellers are not permitted to take possession of any proceeds when the relinquished property closes. If you take any of the proceeds, the IRS will nullify the entire 1031 exchange, and you may incur the total potential capital gains tax liability. Always utilize a Qualified Intermediary to handle all funds between the sale of repurchase of your assets.

A property is considered “identified” when a written purchase and sale contract is fully executed between you and the seller of the replacement property.   

You may also identify multiple replacement properties within your 45-day post-closing period. To formally identify numerous properties, you must provide your Qualified Intermediary with details for each asset you’re interested in purchasing.

NO. The IRS only permits the identification of properties under one of the following 1031 identification rules: The 3-Property Rule: The investor can identify up to 3 replacement properties without considering the market value or purchase price of the replacement properties. However, the investor must purchase one of the three specified properties. Tip: Always negotiate and/or contract your identified properties before formal identification is made to your QI. The 95% Rule: The investor can identify an unlimited number of properties; however, the investor must purchase a minimum of 95% of the total value of all identified replacement properties. The 200% Rule: The investor can identify an unlimited number of properties; however, the total combined value of the newly identified properties cannot be greater than 200% of the sales price of the relinquished property.
Within 45 days from closing on the sale of your property, you must identify your new replacement property. Within 180 days from closing on the sale of your property, you have to close on the acquisition of your replacement property.
Yes – there are three primary types of 1031 exchanges as follows: A Delayed or “Deferred” Exchange. This is the most common type of 1031 Exchange, where an investor sells property and then exchanges it with a replacement property within 180 days. A Reverse 1031 Exchange. This is a rare and more costly type of 1031 exchange, where the investor purchases the property before selling the relinquished asset. Under a reverse 1031, the investor cannot take possession of the newly acquired asset until the relinquished asset is sold. A QI must hold the title of the newly acquired property until the relinquished property is sold. A reverse 1031 Exchange creates a more costly transaction and is infrequently utilized. A Build-to-Suit 1031 Exchange. A Build-to-Suit 1031 Exchange allows investors to build, construct, or develop the replacement property. This is not overly common because all construction must be completed within the allotted 180-day timeframe.
If you’re considering a 1031 Exchange, it is essential to utilize the services of an experienced commercial real estate professional to methodically and strategically align all pertinent milestones. Adept commercial brokers will ensure that all contracts allow an automatic extension if no suitable replacement properties are identified. Additionally, it is vital to work with commercial brokers with directly controlled off-market deals so that you’re not overly susceptible to unknown sellers who may default and blow your 1031 exchange.
A Delaware Statutory Trust or DST is an independent legal entity created explicitly as a title holder for one or more income-producing real estate assets. A DST may consist of any single or group of commercial real estate assets and offers investors a beneficial interest in the trust. Under newly passed IRS legislation, participation in a DST qualifies as an investment in “like-kind” property and preserves tax deferrals via a 1031 Exchange.

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