Strategic 1031 Exchange Advisors, LLC (“SEA1031”) consults and serves as a Qualified Intermediary (“QI”) for 1031 tax-free exchanges and is a specialist in challenging transactions resulting from partnerships, lease buy-backs, and other complex exchange structures.
A QI is a functionary that converts the sale and acquisition of qualified like-kind real property from a taxable event to a tax-deferred exchange by ensuring the transaction conforms to IRS regulations. A QI is sometimes referred to as an intermediary, facilitator, accommodator, or qualified escrow holder.
As your QI, SEA1031 will draft an exchange agreement and assignment documents allowing us to act on your behalf for the sale of the relinquished property and purchase of replacement property. We will work with your closing agents for the sale and purchase to make certain the settlement statements correctly identify the exchange and our role as your QI. We will open a segregated bank account to hold the proceeds from your relinquished sale (your exchange funds). The closing agent conducting the sale will wire the proceeds directly into your exchange account. Read More
Although we will assist with executing your 1031 exchange transaction, as a QI we must be a disinterested party in it. A QI is not your accountant or attorney and therefore is not qualified to give accounting, tax, legal or investment advice, and, further, cannot act in an agency capacity on your behalf. For example, we cannot take direction from you regarding the use of exchange funds because we are obligated to use them only for the purchase of replacement property for your exchange. If you need cash from the sale of your relinquished property, you should take it out at the sale closing (please note that any such cash taken out at closing will be fully taxable). If you do not and afterward ask us to send exchange funds to you or elsewhere for another purpose, we cannot do it until the end of the exchange.
1031 Exchange Benefits
A taxpayer who successfully executes a 1031 exchange transaction will defer federal gains tax resulting from the sale of its relinquished property. Completing an exchange might satisfy other taxpayer investment needs as well. Here is a list of benefits to completing a 1031 exchange:
Capital gains taxes otherwise payable on the taxable gain resulting from the sale are deferred and transferred to the replacement property. Tax is not due until the taxpayer sells the replacement property without utilizing a 1031 exchange. Since there is no limit to the number of exchanges a taxpayer can complete, it is possible to defer the payment of tax repeatedly.
Taxpayers may accumulate multiple property holdings and eventually determine the need to consolidate them into a few larger assets. Conversely, taxpayers may own only one substantial property, and desire to diversify their holdings across several different properties. A comprehensive exchange strategy can help taxpayers achieve these portfolio objectives.
Many taxpayers own investment property that is management-intensive. These taxpayers may want to defer tax when selling their relinquished property, but do not want to acquire replacement property that requires substantial management commitment. Potential solutions for this dilemma include the purchase of triple net lease (NNN) property, tenant-in-common (TIC) interests or Delaware Statutory Trusts (DSTs), in which the management, maintenance and repairs are not the responsibility of the taxpayer and are instead handled by the sponsor and/or third party management companies.
Improvement of Returns on Investment (ROI): A taxpayer may wish to sell an underperforming asset and acquire an asset that offers a more attractive cash flow or appreciation potential. Additionally, a taxpayer may wish to trade a non-income producing asset, such as raw land, for an asset that produces positive cash flow, such as a multi-family development. A properly executed 1031 exchange will allow the taxpayer to achieve such an objective.
Potentially, the greatest benefit that comes from utilizing 1031 exchanges is the ability of the taxpayer to preserve all of its equity in the relinquished property. The compounding effect of earning a continual return on all of the equity, instead of a portion of the equity, can result in a higher overall yield for the taxpayer. Read More.
There are two scenarios that will allow a taxpayer to convert the benefits of tax deferral achieved through 1031 exchange into tax savings.
- Scenario 1: Conversion of replacement property to a primary residence
- Scenario 2: Estate Planning
Types of Exchanges
Complex exchanges require a QI with a high degree of expertise and experience. There are several types of complex exchanges and we are an expert in assisting with all of them. We specialize in all types of complex exchanges and challenging transactions resulting from partnerships and lease buy-backs, and other complex exchange structures.
If you are purchasing replacement property first, and then selling your relinquished property afterward, you are doing a REVERSE EXCHANGE.
If you are using exchange funds to build improvements on property you purchase in the exchange, you are doing a CONSTRUCTION EXCHANGE. A construction exchange can be a forward exchange or a reverse exchange.
If you are using exchange funds to build on property you or a related party already owns, you are doing a CONSTRUCTION LEASEHOLD EXCHANGE. A construction leasehold exchange can be a forward exchange or a reverse exchange.
There are two versions of this exchange transaction. In the first version, two properties are “swapped” by two parties who simply wish to trade properties. Taxpayer A gives his property to Taxpayer B, in return for Taxpayer B’s property. The other version of this exchange involves the sale of one property and the simultaneous acquisition of another. The taxpayer sells relinquished property to one party and then immediately acquires replacement property from a third party. To ensure that this exchange qualifies for tax-deferral under the safe harbor regulations, the taxpayer should engage the services of a QI.
Many investors own real property through partnerships. When the partnership decides to sell it, individual partners may or may not desire to perform an exchange. This can often create difficulty for the partners and hinder the exchange process. Luckily, there are structuring options that will allow partners to succeed in completing tax deferred exchanges. SEA1031 is an expert in assisting partnerships and partners with structuring successful exchanges.
Strategic 1031 Exchange Advisors, LLC, a Georgia limited liability company, is a qualified intermediary for 1031 exchanges only. It is not an accounting firm, law firm or registered investment professional and therefore is not qualified to give accounting, tax, legal or investment advice, and, further, cannot act in an agency capacity on behalf of its clients. This website is for informational purposes only and does not and is not intended to constitute accounting, tax, legal or investment advice. We advise you to consult with your accountant, attorney and investment professional on all matters related to your exchange.