Top 1031 Exchange Tips You Need to Know

15 Essential 1031 Exchange Reminders: Compliance, Security & Choosing the Right QI

1. 1031 is not a tax loophole. Section 1031 has been part of the US tax code for more than a century, allowing taxpayers to legally defer taxes.
2. 1031 Exchanges allow taxpayers to defer federal capital gains tax, most state taxes, tax on unrecognized gain due to depreciation, and the net investment income tax imposed by the Affordable Health Care Act.
3. A Qualified Intermediary (QI), like IPX1031, is required unless taxpayers are directly “swapping real estate” with no money changing hands. A QI provides expertise, prepares the necessary documentation, securely holds the taxpayer’s funds during the Exchange period, and coordinates with settlement agents.
4. QIs are not regulated by the federal government or by most state governments. It is up to taxpayers to evaluate both the competency and security of any potential QI.
5. What to demand in a QI: Security, Compliance & Financial Assurances. Not all QIs are equal. The wrong choice can expose you to fraud, disqualification of your 1031 Exchange resulting in immediate tax liability, or even complete loss of your funds due to theft or bad investments.

Always verify that your QI:

• Operates with financial strength, experience and transparency – IPX1031 is a wholly owned subsidiary of Fidelity National Financial, a Fortune 500 company
• Maintains substantial insurance – IPX1031 provides a $100M fidelity bond, $50M performance guaranty, and $30M E&O coverage
• Is staffed with 1031 experts – IPX1031 leads the industry with attorneys, CPAs, and the highest number of Certified Exchange Specialists® (CES®) on staff
• Segregates client accounts – IPX1031 segregates client funds in the nation’s strongest banks under each taxpayer’s ID
• Has safeguards in place to securely protect exchange funds – IPX1031 has advanced systems and controls in place to safeguard funds

6. Fraud is real. Cyber and real estate fraud pose serious risks to 1031 Exchanges. With ongoing threats of wire fraud, phishing, and scams targeting real estate transactions, it is critical to work with a QI that has robust security systems, insurance, and safeguards in place to protect Exchange funds.
7. 1031 Exchange rules and regulations are non-negotiable. Every requirement must be strictly followed to avoid an IRS audit which may result in the disqualification of your 1031 Exchange and/or allegations of tax fraud. Avoid any QI that is willing to “bend the rules”. To fully defer taxes, investors must purchase Replacement Property of equal or greater value than the Relinquished Property, reinvest all net proceeds, and replace the value of any debt through new debt, additional cash, or both. Exchanges must follow strict time limits: 45 days to identify Replacement Property and 180 days to close. Importantly, taxpayers cannot have actual or constructive receipt of sale proceeds. And an exchange must be set up before the Relinquished Property transfers.
8. Reverse Exchanges, where an Exchanger buys first and sells second, may give you the advantage to maximize your tax deferral. These are more expensive and complex than “regular” exchanges but often are useful when the new property needs to be purchased before the sale of the old property.
9. Exchanges between related parties are permitted, however, specific rules must be followed.
10. Partnerships and LLCs can utilize 1031 Exchanges.
11. QIs like IPX1031 cannot give specific advice – only information.  Always seek advice from your financial planner, tax attorney and CPA relating to your specific tax and investment goals and situation.
12. There are many non-tax reasons to exchange. 1031 Exchanges can be used to diversify or consolidate portfolios, to increase cash flow, reduce operating expenses, increase appreciation potential, obtain less management intensive property, relocate an investment and exchange for a property that can be used in the taxpayer’s business, and even as an estate planning tool.
13. Does a 1031 Exchange make sense for you? Do a quick 5 Point Analysis.
14. Proper planning is essential. A successful 1031 Exchange starts well before closing. Exchangers should consult with their advisors early, line up a trusted QI, and evaluate potential Replacement Properties to ensure compliance with deadlines and requirements.
15. Start with the right QI. Choose one (like IPX1031) that has extensive experience, attorneys, CPAs and 1031 professionals on staff, provides financial security and insurance, and that has safeguards in place to protect exchange funds.

Please reach out to one of your local IPX1031 experts to discuss the possibility and feasibility of your or your client’s next 1031 Exchange.

IPX1031. The best choice for your 1031. 

IPX1031 is the largest and one of the oldest Qualified Intermediaries in the United States. As a wholly owned subsidiary of Fidelity National Financial (NYSE:FNF), a Fortune 500 company, IPX1031 provides industry leading security for your exchange funds as well as considerable expertise and experience in facilitating all types of 1031 Exchanges. Taxpayers’ funds are held in segregated accounts using the Exchanger’s taxpayer identification number. Our nationwide staff, which includes industry experts, veteran attorneys and accountants, are available to help you and your legal and tax advisors. For additional information regarding IPX1031 and questions on 1031 Exchanges, please review:

How Important is Your Qualified Intermediary?
Opportunities of the 1031 Exchange
QI Importance to 1031 Exchange Success
1031 Exchange and Defer? Or Sell and Pay Taxes?
Capital Gains Estimator
What is a 1031 Exchange?
IPX1031 Knowledge Center