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 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.