1031 Exchange Coordination & Oversight

1031 exchanges are also referred to as “like-kind exchanges” and sometimes called “Starker exchanges.” Real estate investors use these terms interchangeably to describe the process of a typical deferred exchange that real estate professionals have become accustomed to when navigating commercial real estate transactions.  

Simply stated, a 1031 exchange occurs when a person or business entity sells real estate and purchases another investment real estate asset. If investors follow transactional procedures correctly, the IRS recognizes the transaction as an exchange rather than a sale and repurchase of a replacement property. This recognition as an exchange allows investors to defer the payment of any taxes that would otherwise be due upon the asset’s sale. Those taxes include capital gains, depreciation recapture, net investment income, and state taxes.

1031 Exchanges were born with The Revenue Act of 1921 and continue to be a vital tool in commercial real estate investment strategies and a valuable mechanism for proper asset allocation of any investment real estate portfolio.

1031 Exchanges apply to “like-kind” business or investment property. The “like-kind” parameters in the exchange rules are reasonably flexible. It allows for selling any commercial or investment property and purchasing any other property that fits the same definition. Under “like-kind” guidelines, a retail shopping center can be exchanged for land, or a warehouse property can be exchanged for a multifamily asset. Generally, a seller can exchange any real property for any other real estate asset as long as the property is not used for the personal use of the exchanger.  

The Process

The most common type of exchange is a “forward exchange”. This structure allows the exchanger to sell the relinquished property and acquire a replacement property at a future date. This process is a standard 1031 exchange and requires the use of a Qualified Intermediary.  

A Qualified Intermediary (“QI “) is an independent third-party exchange company that facilitates the exchange and holds all cash proceeds for the period of time between the sale of the relinquished property and the purchase of the replacement property. It is possible to execute a Reverse 1031 Exchange, where the investor purchases property before selling the exchange asset. However, a reverse 1031 Exchange is more complex and costly than a forward exchange.

Several steps are necessary to complete to preserve the tax benefits of a 1031 exchange. The seller must set up the exchange at or before closing the relinquished property sale. The QI retains the proceeds from the sale, and receipt of the proceeds cannot be accepted by the exchanger. The exchanger has forty-five days from the sale of the relinquished property to identify the replacement property by providing the qualified intermediary with addresses or descriptions of any contemplated replacement properties. Then, the exchanger must close the purchase of the new replacement property within 180 days from closing on the sale of the relinquished property. Sometimes, this 180-day period is shortened if the due date of the exchanger’s tax return falls within 180 days unless the exchanger files a tax return extension. 

Compass Commercial’s 1031 Exchange Oversight 

Generally, the role of any commercial real estate broker is not significantly altered when facilitating a 1031 Exchange. However, the effective reallocation of investment assets requires expert broker assistance to strategically execute a 1031 exchange while dynamically capturing market trends and aligning all negotiating, contract, and closing timelines.  

The experts at Compass Commercial are adept and well-versed in all aspects of the 1031 exchange process. The GoCommercial Team at Compass has facilitated hundreds of successful exchanges for clients throughout the country and across all types and classes of investment property. 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 necessary to defer any tax liability.   

Contact Compass Commercial today to discuss your potential 1031 Exchange.

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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GoCommercial Group is a real estate team affiliated with Compass. Compass Florida, LLC D/B/A Compass is a licensed real estate broker and abides by equal housing opportunity laws. All rights reserved.
BRAD KUSKIN is a licensed Broker Associate in the State of Florida with License #BK3333122:

All material presented herein is intended for informational purposes only. Information is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice.
No statement is made as to the accuracy of any description. All measurements and square footages are approximate. This is not intended to solicit property already listed. Nothing herein shall be construed as legal, accounting or other professional advice outside the realm of real estate brokerage.