Three Important Tips for 1031 Exchanges


You may take this fact for granted. You shouldn’t. The 1031 exchange industry is largely unregulated. In addition, when your 1031 funds are on deposit with a facilitator or intermediary, those funds legally belong to them. This leaves you open to risk if something bad happens to your facilitator. It’s a great deal of risk for the average investor to take on—mostly likely too much risk. To ensure the safety of your funds, insist that your facilitator places them in a Qualified Escrow or Qualified Trust Account when you start an exchange. That is the only way to ensure that your exchange proceeds are going to be outside of the reach of anyone but you and a regulated bank or financial institution.


One of the most difficult aspects of any exchange is identifying your potential replacement properties within your 45-day ID period. You should start looking well before your property exchange is even closed, especially in hot markets where there are more buyers than sellers.


The realities and consequences of not identifying a replacement property are so severe, that if you don’t already one under contract, you should look into 1031 Identification insurance. Essentially, this means you also identify as your third party an institutional investment or professionally managed DST, which qualified for deferred gain treatment until Section 1031, when you use the three-property rule to identify properties to your facilitator. This will provide a safe backup if you aren’t able close on your other two properties, These institutional alternatives are also solid investments in their own right—always professionally managed, and offering returns in the neighborhood of five to seven percent.


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