Business, Personal Finance

Knowhow: what to consider if hiring a 1031 exchange accommodator

1031 exchange

Image via: Pexels

This guide outlines everything you need to know about using a 1031 exchange accommodator.

The real estate industry is still generating new millionaires every year. Properties investors make a fortune off selling and renting properties. But those are just the basics; there are other ways people make wealth from real estate, one of which is through the 1031 exchange.

Suppose you’re looking to grow your investment portfolio through the 1031 exchange option, we’ll discuss everything you need to know before hiring a 1031 exchange accommodator, including their functions and qualities. Read to the end!

What is a 1031 Exchange? 

Basically, a 1031 exchange is a process that involves the swapping of properties that were held for investment or business purposes. With a 1031 exchange, the exchanger defers the capital gain taxes that were supposed to be paid when the property was sold and pushes it to a later date (the date the property is sold).

So instead of selling a property and paying capital gain taxes, you exchange it for another and defer to a later date. The exchange process can be done continuously, and when the property is finally sold, the taxes are paid as a one-time tax.

But as exciting as this may sound, it can be very dangerous. The Internal Revenue Code (IRC) has put several tight rules to guide the process; if any of these rules are ignored, it could land you into serious legal problems.

That’s why you need a 1031 exchange accommodator to walk you through the exchange process. A qualified exchange accommodator is crucial to a successful exchange process. Besides  making sure you don’t break any rules, they also hold the exchange funds.

Why do you need a 1031 exchange accommodator?

1031 exchange accommodators are agents who play a major role in the exchange process. They must ensure that everyone walks away satisfied without breaking any rules. 

The following are some of the main functions of an exchange accommodator in the exchange process:

  • They hold the funds from the sale of the exchanged property because, according to the rules for a 1031 exchange, the exchanger can’t receive these funds until the entire process is completed. The Qualified Intermediary 1031 Exchange Accommodator holds the funds in escrow until the deals are signed and approved.
  • Most 1031 exchange processes are usually done in a rush because of the time limit set by the government. 

The first rule for a 1031 exchange is finding suitable replacement property and documents signed within 45 days. Also, the new property must be closed 180 days from the sale of the exchanged property. 

The function of the exchange accommodator is to make sure these documents are completed before the time limit elapses.

  • After the process must have been completed, the exchange accommodator transfers the exchanger’s funds to the seller, sealing the deal.

These are just the major functions of a Qualified Intermediary but they offer more than that during the process. 1031 exchange accommodators have fully understood the 1031 rules and will guide you to a successful exchange free from errors. 

The exchange process is very delicate, and a little error can lead to the disruption or termination of the deal by the IRS, forcing you to pay capital gains taxes for the failed exchange.

Qualities a 1032 Exchange Accommodator Must Have

Choosing the right accommodator can be a very tiring process. 1031 accommodators are not licensed or regulated by any government body. So if you’re planning to hire an accommodator, the person must be regulated and licensed by a well-known regulator body. An example is a banking regulator.

But having a license isn’t enough, so before you search for the “1031 exchange accommodator near me”, confirm if they have these qualities.

  • The Ability to Prepare Legal Documentations

With proper usage, the 1031 exchange process can be your path to success in the real estate industry, but you’ll have to be careful with every detail.

A quality exchange accommodator must be able to handle the drafting of exchange and transactional documents. This must be done with uttermost care because the tiniest of errors can lead to the Internal Revenue Service (IRS) blocking the exchange. If this happens, it’ll result in you paying for the capital gain taxes and depreciation recapture you were trying to avoid. It might also incur some costly penalties.

A good exchange accommodator must have experience reviewing and ensuring that transactional exchange documents are in order. Accuracy in documentation is a must.

  • Hold Exchange Proceeds 

Generally, a taxpayer isn’t allowed to take the proceeds of a 1031 exchange; an intermediary party is needed. A quality exchange accommodator must be able to hold and safeguard the exchange funds till the transactions are complete. 

The main reason exchange accommodators hold the exchange funds is to avoid constructive receipt of the exchange funds. 

There are some ways to confirm if your funds are safe. Ask for a copy of your accommodators’ fidelity bonds and also ask them if they have Errors and Omission insurance (E&O). These two things will confirm if your money is going into the right hands.

  • Technical Ability

A 1031 exchange isn’t only taxes, escrow, or legal decision; it’s also a financial investment choice. 

The goal is to make more money and grow your real estate portfolio. You’ll need an accommodator that has the technical ability to ensure you walk away smiling. 

Also, the 1031 rule is very broad, and a quality accommodator can give you answers to all the questions you might have. So it’s up to you to find the best exchange accommodator for your exchange. Bear in mind that more experience results in higher 1031 exchange accommodator fees.

The Bottom Line

A 1031 exchange is simply swapping business or investment properties to avoid paying capital tax gains. The rule has helped many real estate investors grow their wealth and portfolio.

But unless the entire exchange process happens in a day, it’s almost impossible to complete the process without an exchange accommodator. Their functions are paramount to the success of any exchange. They’re responsible for the transaction documents and holding of exchange funds till the process is completed.

ALSO READ: How to start in beginner investing: smart strategies