If you are beginning the process of transacting on a 1031 exchange, it is critical to work with an experienced team of 1031 exchange Brokers and Firms. Many buyers make the mistake of falling into a transaction without the proper assistance.This can be a recipe for disaster and may severely impact the outcome of your 1031 exchange. Fortunately, there are 1031 exchange brokers and firms that are able to help and represent your transaction.
The goal of a 1031 exchange is to defer the capital gains taxes by taking advantage of Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031). Many buyers purchase property as a pure investment and this allows them to swap their property for another real estate holding without surrendering a large portion of their gain to taxes.
Keep in mind, property in the exchange must be identified as like-kind property. However, these rules are fairly lax and allow investors to exchange residential property for commercial real estate assets and vice versa. As long as the property is within the United States, the exchange can be considered like kind. A 1031 exchange does not allow real estate to be swapped for personal property or any form of livestock, such as cattle.
1031 exchange Brokers and Firms – Setting the Tone of the Transaction
When beginning the 1031 exchange process, 1031 exchange brokers and firms should promptly advise the hiring of a qualified intermediary or QI. This is the first step in the process and a QI must be chosen to assist with your 1031 exchange. All funds from your relinquished property must go directly into an account held by the qualified intermediary. This requirement in the process is vital to the exchange.
Experienced 1031 Exchange Brokers and Firms may be able to recommend several qualified intermediary Companies. A real estate attorney may be able to provide a referral as well. There are quite a few intermediaries that can handle these types of transaction, but make sure to choose a knowledgeable firm or individual. Do not simply choose the intermediary that offers the lowest cost. This would be a mistake, as the extra amount requested is worth ensuring that your 1031 exchange goes smoothly.
When choosing a qualified intermediary, there are numerous questions to ask, most importantly the process of disbursing the funds for both the contract deposit and remainder of funds disbursed at the closing table.
For our clients, JSG Realty, one of the premier 1031 exchange brokers and firms in this niche industry, provides a series of critical items and questions to discuss with your qualified intermediary. If necessary, we can recommend an intermediary that may work for you. Please make sure the QI is familiar with the state of your property transaction.
Relinquishing Your Property
After selecting your qualified intermediary, you can now move forward with the sale of your relinquished property. The reason an intermediary must be selected before the sale of your original property is to ensure the funds go directly into the account of the QI.
Following the closing of your relinquished property, it is important to begin looking for your replacement property with the help of your exclusive 1031 exchange brokers and firms. With the vast experience your team may possess, the process should lead to a smooth and seamless transaction.
In fact, we recommend speaking with 1031 exchange brokers and firms in advance to understand the types of properties that may make sense for your exchange.
Keep in mind, every buyer has different preferences when it comes to an exchange property. Some purchasers prefer the stability of a multi-family residential property. This may require more hand on activity and property management experience, but it is a bit more risk averse.
Commercial properties, specifically triple or absolute net lease properties are relatively hassle free and are sometimes referred to as coupon clippers. However, if the tenant breaks the lease, the space may take more time to fill than a residential multi-family property.
1031 exchange brokers and firms should be very familiar with commercial property placement, as it is very common in these types of transactions.
An absolute net lease or bonded net lease is defined as zero landlord responsibilities. The tenant pays the taxes, insurance and maintenance, including the roof and structure.
Leases that may be less attractive for a 1031 exchange buyer include gross leases. These are structured with the landlord often paying property taxes, insurance and maintenance. The tenant is strictly responsible for the monthly rent and utility expenses.
Knowledgeable 1031 exchange brokers and firms will locate triple net properties that possess a corporate backed tenant. This guarantees the lease in the event of a default or lease break. One must also review the lease for any form of kick-out clause. This would allow the tenant to terminate the lease if certain sales targets are not being met.
Another option that 1031 exchange buyers opt for is the purchase of single family homes or Apartments for investment purposes. These can be very stable assets, but sometimes generate lower returns than multi-family or commercial properties depending on the market and region.
Finally, the acquisition of land can be a fourth type of investment for a 1031 exchange. Certain investors desire the appreciation potential of land to sell at a future date once the value increases. Land valuations can be very speculative and take many years for full appreciation. They are not cash flow positive, but may provide certain tax deductions on an annual basis.
Full Disclosure and a Candid Conversation
As 1031 exchange brokers and firms, it is our responsibility to present an array of opportunities before and after the sale of the relinquished property. Understanding the type of assets preferred takes time research, locate and purchase. One has to feel comfortable with the investment strategy and be ready to move forward as soon as possible.
JSG Realty will also assist in locating residential or commercial tenants for your 1031 exchange property. We can help with property management and any other specific requests moving forward with your property.
With all types of investments, analyzing the rate of return, expenses, tax and long-term appreciation will determine the attractiveness of the property. The location of the property is extremely important and stage of life may play an impact as well when deciding your replacement property. If you are still active in your career, you may be more risk tolerant and if retired, your goals may change.
Not all 1031 exchange brokers and firms will break-down the entire snapshot of potential replacement properties. At JSG Realty, we create spreadsheets, presentations and walk you through the entire process over a cup of coffee or phone call at your convenience. Working with the right 1031 Realtor is essential.
The Identification Period
Each 1031 exchange buyer has 45 days from the sale of their relinquished property to select a replacement property. A buyer is allowed to select three properties or be in accordance with the 200% rule. Even if a 1031 purchaser is set on a specific property, identifying back-up investment properties is important in case the transaction of the preferred property falls through.
Once the list of 1031 exchange properties is submitted, a buyer has 135 days to close on the replacement property. This is six month minus the 45 day identification period.
If the purchase of the replacement property is all cash, this will be a very simple transaction. Most of the time, a seller will require a deposit payment in order to sign a contract. However, if the buyer is planning to close soon-after contract signing, proof of funds may be all that is needed.
You must verify with your 1031 qualified intermediary that the contract deposit funds are allowed to be pulled from your 1031 exchange account. While there are ways to structure this transaction, we recommend verifying with your exchange intermediary.
A Pitfall to Avoid
One mistake we have witnessed first-hand is an occasional carefree attitude by 1031 exchange buyers. As well-versed 1031 exchange brokers and firms, we stress the need to identify your replacement property as quickly as possible. In addition to the identification, its equally important to verify the property is available for purchase and validate the sellers willingness to go to contract immediately. The exchange property must be attainable and the seller or sellers broker must be willing to work on the transaction as soon as possible. The possibility of a delay or being outbid by another buyer in this circumstance will impact the identification list. Therefore, identification is not enough. 1031 exchange brokers and firms must make sure the property can go to contract in a timely manner.
The identification of informative 1031 exchange brokers and firms can be the heartbeat to your 1031 transactions. At JSG Realty, we divulge all of our knowledge to clients to ensure they purchase a replacement property that suits their needs. The acquisition of a real estate is cash intensive and investors are empowering there hard earned funds to be trusted with the property you help select.
Real Estate ownership is not a short term responsibility, but a long-term asset that will stay within a family portfolio for many years.
JSG Realty takes the 1031 exchange transaction very seriously , establishing itself as one of the top 1031 exchange brokers and firms that you can select for this special purchase.
Please feel free to contact us with any further questions or comments regarding your 1031 exchange.