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Knowing the best 1031 exchange companies can save you a lot of money when it comes to selling investment properties. In fact, using a 1031 exchange company is one of the best ways to avoid paying capital gains tax on a rental property altogether.
If you are a real estate investor, by using one of the best 1031 exchange companies as a qualified intermediary listed below, you can defer the payment of capital gains tax until death if you choose. At some point Uncle Same will get his money!
A 1031 exchange can be used to defer taxes if all of the requirements are met. This wealth building tool allows an investor to defer as much as 30% capital gains tax.
For that reason, real estate investors use the best 1031 exchange companies as a qualifying intermediary to handle these highly complex transactions.
Administering a 1031 exchange is not for a beginner investor to navigate.
However, if you are a real estate investor, using 1031 exchange companies to buy properties with is a great strategy to gain access to capital to use for future “like-kind exchanges” for real estate investments instead of paying capital gains tax instead.
Below are some of the best 1031 exchange companies that can administer 1031 exchanges.
What is a 1031 Exchange
A 1031 exchange gets its name from the IRS tax code section 1031. The purpose of a 1031 exchange is to defer your tax gains when you sell an investment property by purchasing another like-kind property. Internal Revenue Code 1031 allows you to do this through a deferment process in which all of your gains are reinvested into a new property instead of taxed.
All of your profits that you would normally be taxed on are deferred as long as you purchase a similar like-kind property.
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Who Qualifies for a 1031 Exchange
Normally, a 1031 exchange is meant for businesses and owners of investment property. This can include individuals, S corporations, C corporations, LLC’s, trusts, general partnerships, limited partnerships, and other tax paying entities. These entities mentioned above can set up an exchange of business or investment properties for like-kind business or investment properties. Property owners for property such as primary residences, second homes, or vacation homes that are used for personal use would not qualify for a 1031 exchange.
What are the Advantages of a 1031 Exchange
The advantages of a 1031 exchange are that you can defer taxes on the sale of one property and use that money as working capital on a new property if it is considered a like-kind property. You can use that working capital to build your business faster as well and the capital can be thought of almost like a no interest loan.
You will at some point have to pay the tax on the transaction, but the advantage of a 1031 exchange is that you can keep rolling over what normally would be capital gains taxes, into a tax-deferral status.
How Do I Start a 1031 Exchange?
You can start by investing capital into real estate assets. Use your capital to invest in some of the best ways to invest 50k in real estate for example, roll over those profits, and defer taxes indefinitely. The best 1031 exchange companies can do these transactions
The money that would have been used to pay long term gains can now be used to expand your business and investments.
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What is a Like-Kind Property
Like-kind properties are properties that are the same in character or nature of each other that will be exchanged in the 1031. Both properties must be held for a business, trade, or for investment purposes. Most real estate will be like-kind to other real estate. Two properties that differ in quality or grade, are still considered like-kind properties. Properties are considered like-kind even if one property is improved and the other is not.
An example of like-kind properties would be an improved 4 unit building to an unimproved residential single family rental home.
The 1031 exchange is still an exchange between real estate to real estate.
It does not matter if one property is in a class A neighborhood and maintained while the other is in a class C neighborhood and vacant.
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What Can You Buy with a 1031 Exchange
In its easiest form, you can sell and buy like-kind properties with a 1031 exchange in a simultaneous swap. This would include real property with different grades. Generally real estate to real estate is acceptable with the use of a 1031 exchange however there are a few exclusions.
1031 Exchange Exclusions & Like-Kind Property Exclusions
There are some exclusions when it comes to like-kind property.
One exclusion of like kind property is that the two like-kind properties in the exchange must both be located in the same country. One property located within the United States and one outside of the United States would bot be considered like-kind properties.
The other like-kind exclusion is that that land must be present. One property with land (regardless of finish or nature) would not be like-kind to a property without the land.
An example of this exclusion would be selling a duplex and you want to buy a mobile home without land.
In this scenario, you would not be able to do a 1031 exchange because land is included with the duplex, but it is not included with the mobile home.
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1031 Exchange Process
If a simultaneous swap between the two properties is not possible, you are allowed to sell one property and buy another within a certain timeframe. This is known as a deferred exchange.
Opposite of that, there is what is called a reverse exchange where you locate the replacement property first and park it with a holding company, and then sell your initial property in which you will us the tax-deferred proceeds.
A reverse 1031 exchange is much more complex to administer.
Despite which 1031 exchange you follow, there are two time limits that you must adhere to or your transaction becomes taxable. You can hire a qualified intermediary to assist with the 1031 exchange process.
If you are a beginner investor, it is highly recommended that you use the services of a qualified intermediary because a 1031 exchange has a lot of moving parts, documents, and criteria that need to be satisfied in order to qualify. All it takes is one blown deadline and your transaction will become taxable.
There is a list of the best 1031 companies down below in this article.
1031 Exchange Timeline
As stated above, there are two timelines that you must meet in order to keep your sale transaction in a tax deferment state.
In a 1031 exchange, the 1031 exchange timeline becomes really important. That is why using one of the best 1031 exchange companies as a qualified intermediary is important.
The first 1031 exchange timeline is a 45 day timeline to identify a property to purchase. The 45 day timeline to identify a replacement property to purchase starts from the day you sell your property. The 45 days adheres to calendar days, not business days.
Once you have identified the subject replacement property to purchase, there are a few things you need to do. Any of the best 1031 exchange companies can help you satisfy these requirements.
- You must provide notification in writing to a person involved in the exchange. This can include the seller and/or the qualified intermediary involved with the 1031 exchange. The notification must also be signed by you as well.
- You can also give notice to your accountant, real estate agent, attorney, however this is not sufficient for satisfying the 1031 exchange criteria for proper process to give notice.
- The subject replacement property must be clearly described with written identification of the property, such as street address, and the parcel legal description. Most title companies and real estate agents can obtain the legal descriptions of properties. Often times, these are listed in the MLS, however there are certain situations where the legal description may be too long and if that is the case, you can either contact a title company or the municipality where the property is located to obtain it.
The second 1031 exchange timeline is a 180 day timeline to complete the exchange.
- Replacement property must be received no later than 180 days after the sale of the initial exchanged property or if tax return deadline is sooner.
- If the due date of the income tax return for the tax year the property was sold in (including extensions) comes before 180 day deadline, then the tax return deadline supersedes the 180 day 1031 exchange deadline.
As you can see, the 1031 exchange timeline is vital to protecting your tax-deferred status of the exchange transaction.
There are a lot of ways to save money on taxes, and using one of the best 1031 exchange companies is just one strategy.
Using qualified intermediaries will help streamline the transaction for you. I have listed the best 1031 exchange companies below.
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Reporting for 1031 Exchanges
Everyone’s tax situation is different which is why you always should seek the advice from a licensed certified public accountant or tax advisor as to your particular tax liabilities.
You can use IRS form 8824 for reporting 1031 like-kind exchanges. That will be filed with your tax return. Some of the items you should be aware of that the form asks are noted below:
- Descriptions of properties received
- Property identification and transfer dates of properties
- Adjusted cost basis of like-kind property
Best 1031 Exchange Companies – Qualified Intermediary
Listed below are some of the best 1031 exchange companies available to help assist with the administration of your 1031 tax-deferred exchange.
Check out these popular 1031 exchange companies as they are all great choices for a qualified intermediary to assist with 1031 exchanges.
1031 Corp. – Based in Collegeville, PA, 1031 Corp possesses over 150 years of combined knowledge dealing with 1031 exchanges. A lot of their staff carry the Certified Exchange Specialist Designation. Additionally, their staff consists of paralegals and also CPAs in addition to 1031 exchange specialists. They are one of the best 1031 exchange companies offering detailed closing packets with all of the relevant information to make reporting your sale on form 8824 to the IRS simple.
1031x.com Exchange Services – Located in Colorado, 1031x.com has exchanged over $2.0 Billion in exchanges and offers service in all 50 states. Through their combined staff made up of real estate brokers, licensed attorneys, and former financial advisors, they have a combined 50 years of experience.
All States 1031 Exchange Facilitators – All States 1031 Exchange Facilitators is a division of parent company Strategic Property Exchanges. They are known as a boutique law firm they are one of the best 1031 exchange companies that specialize in 1031 exchanges. As a qualified intermediary, they offer services for reverse exchanges, delayed exchanges, and many other types of highly specialized 1031 exchanges.
Asset Preservation Inc. – Asset Preservation Inc. (API) is based nationally in California. It is one of the best 1031 exchange companies and has completed over 180,000 1031 exchanges. They also are a member of the only national trade organization for exchanges known as the Federation of Exchange Accommodators.
Exter 1031 Exchange Services – Nationally based in San Deigo, California, Exter 1031 Exchange Services is a qualified intermediary that adheres to government and regulatory oversight. If you are client of Exter 1031 Exchange Services, your money is safe and held in a trust company. Additionally, Exter 1031 Exchange Services is also regulated by the Wyoming Division of Banking. Check out their site for more details.
First American Exchange Company – First American Exchange Company may look familiar to you at first glance. The reason for this is that they are a huge leader and provider of title insurance for the mortgage and real estate industries and have been providing services since 1889. That makes First American Exchange Company one of the best 1031 exchange companies. They also offer 1031 exchange services and are one of the best 1031 exchange companies as well. First American Exchange Company operates as a subsidiary of First American Title Insurance Company. In most cases they can offer an indemnification letter to protect your transaction.
Gain 1031 Exchange Company – Serving Wisconsin, Minnesota, and North Dakota markets, Gain 1031 Exchange focuses solely on exchanges. They are members of the Federation of Exchange Accommodators and qualified as a Certified Exchange Specialist.
IPX 1031 – A national company, IPX 1031 is considered one of the best 1031 exchange companies with more than three decades of experience. They also have more than 8 regional offices to offer qualified intermediary services from for their clients. IPX 1031 specializes in delayed exchanges, reverse exchanges, and also improvement exchanges.
Old Republic Exchange – Old Republic Exchange was formed in 1993 and is a subsidiary of Old Republic International Insurance which has almost $20 billon of total assets. They offer exchange services for delayed exchanges, reverse exchanges, and other services as well. They are members of the Federation of Exchange Accommodators and have certified exchange specialists on staff to assist.
Starker Services – Created in 1987, Starter Services is considered one of the best 1031 exchange companies around. Starker Services is a qualified intermediary that provide their clients with sound tax-deferred strategies. Their company was also one of the first exchange companies in the country to receive the Certified Exchange Specialist and also have officers who sit on the Federation of Exchange Accommodators board.
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Defer Taxes with 1031 Exchange Companies
The bottom line is that if you want to defer taxes on your long term capital gains, completing a 1031 exchange makes sense. This makes a lot of sense especially for businesses and investors if they are looking for ways to save money on housing through tax deferral.
Completing a 1031 exchange on the other hand is not a simple task. With timelines that cannot be missed and conversions that need to be recorded, there is no question that a 1031 exchange transaction is not a simple task.
However, by using one of the best 1031 exchange companies mentioned above as a qualified intermediary, the process becomes a bit easier.
If you are new to the world of real estate investing, using one of the best 1031 exchange companies will not only help you with the actual transaction, but will also prepare your documents for IRS reporting for 1031 exchanges and form 8824.