IRC Section 1031 is undeniably one of the most generous sections of the tax code; however, the IRS rules and timing requirements to complete a tax deferred 1031 exchange are stringent. Navigating the 1031 process can be complex and a misstep can result in either a failed exchange or the purchase of replacement property that is not suitable. Experienced real estate investors will tell you that having the right team in place and working with a licensed 1031 Exchange Advisor will help ensure your Exchange is successful and meets your objectives.
The Role of a 1031 Exchange Advisor
Think of a 1031 Exchange Advisor as the team captain—and every team needs a good captain. A quality 1031 Exchange Advisor is licensed through FINRA and is highly experienced with an in-depth knowledge of the exchange process, tax code, 1031 exchange strategies, and replacement property options best suited to address your objectives.
As the team leader, your 1031 advisor will consult with you to understand your objectives, develop your exchange strategy, help you select and acquire replacement property, and guide you through critical steps of the 1031 exchange process to ensure IRS rules are adhered to at every point. Below are some benefits of working with a licensed Exchange Advisor.
- Your 1031 advisor will help you understand your tax liability and works with you to determine if a 1031 exchange is suitable.
- Provides consultation and recommends 1031 strategies best suited to help meet your objectives.
- Helps you identify and acquire suitable replacement property
- Guides you through the exchange process from start to finish to ensure all IRS rules and timing requirements are satisfied.
- Proactively communicates with your other advisors to ensure all aspects of the exchange are addressed.
How to Select the Right 1031 Exchange Advisor
A good 1031 Exchange Advisor should not only help you find, select, and acquire qualified replacement property but should also serve as a strategic partner and assist in navigating the exchange rules, debt matching considerations, and property co-ownership issues. There are quite a few 1031 exchange firms to choose from; however, like any industry, the level of expertise, years of experience, client focus, due diligence, and services offered vary greatly from company to company. Therefore, when selecting a 1031 exchange firm to work with, you should only consider well-respected firms that can demonstrate the following criteria:
- Is licensed through FINRA: Before working with a 1031 Exchange Advisor, make sure they are licensed through FINRA, a self-regulatory organization under the supervision of the Securities and Exchange Commission. FINRA oversees U.S. broker-dealers and protects America’s investors by ensuring the broker-dealer industry operates fairly and honestly. FINRA oversees more than 624,000 brokers across the country —and analyzes billions of daily market events.
- Is established and well-respected: The 1031 exchange industry is a relatively small community. Word gets around quickly if 1031 firms recommend replacement properties that are not suitable for owners or do not have a firm understanding of the nuances of the tax code. Furthermore, new entrants to the industry have not had the experience navigating multiple market cycles.
- Meets with you to understand and discuss your situation to determine suitability: Developing an optimal transition strategy and selecting optimal replacement property options is a process that must be tailored to the individual client. Some 1031 Exchange Advisors may take a “choose your own adventure” approach, presenting a myriad of options with little context and analysis shared with the client. Instead, a quality 1031 Exchange Advisor will take the time to understand your financial and lifestyle objectives and invest in developing an intentional strategy to position you for success.
- Educates you on 1031 Exchanges, the process, timing, and rules: A good 1031 Exchange Advisor should always take an education-first approach and invest the time to ensure a client is familiar with the tax code and all suitable options available to them. Additionally, your exchange advisor should provide a balanced perspective, sharing both the opportunities and risks any potential course of action presents.
- Provides strategic consultation: While the timeline following the sale of an investment property is relatively short, the exchange process need not feel rushed. Proper planning can extend the timeline and allow for appropriate strategic decisions. Additionally, some strategies, such as a refinance to extract liquidity in advance of a sale, can take a year to “season” before the sale occurs. Your 1031 Exchange Advisor should be patient and willing to work with you over several years if needed to execute a plan that’s in your best interest. Furthermore, they should be available following an exchange to address tax, ownership, and estate planning questions related to the exchange.
- Develops a strategic and achievable 1031 transition plan to help meet your objectives: An owner’s objectives change as life happens and markets change. A transition plan should be a living, breathing strategy that can be updated as needed. Intentionality is key to an optimal exchange strategy. A good (and smart) 1031 Exchange Advisor will always develop a plan that is both strategic and achievable.
- Provides you with all suitable and available 1031 exchange options: There are many exchange strategies and replacement property options available to investment property owners, including fee-simple real estate, net-lease properties, Delaware Statutory Trusts (DSTs), Tenant-In-Common (TIC) property, and even Real Estate Investment Trusts (REITs). A quality 1031 Exchange Advisor should provide all suitable options, be agnostic to the solution, and only recommend those in your best interest and based on your financial and lifestyle objectives.
- Works with your other advisors (CPA, Qualified Intermediary, estate planning attorney, real estate broker, financial advisor): Your 1031 Exchange Advisor must be willing to collaborate with your other professionals to ensure that all the pieces are aligned for a successful exchange. Some 1031 exchange firms provide these services “in-house” and are constantly trying to cross-sell their clients’ accounting, estate planning, and financial planning services. While the integrated approach may appear to streamline the process, we feel it presents a conflict of interest in the recommendations provided to an owner and should be avoided. The real estate transition and replacement property selection process is sufficiently complicated to warrant a firm specializing in this space. You would not want your general practitioner doctor performing surgery on your knee, nor should a financial professional specializing in traded securities develop your exchange strategy.
- Has a strong network of additional professionals to recommend: Competent and established 1031 exchange firms should also have a strong network of proven, trusted professionals or firms that can be recommended to a client if needed.
As Chief Exchange Strategist, Austin Bowlin leads the firm’s team of licensed 1031 exchange advisors and analysts and provides consultation on tax liability, deferral strategies, legal entity structuring, co-ownership arrangements, 1031 replacement property options, and Delaware Statutory Trust investments.
Real Estate Transition Solutions is a consulting firm specializing in tax-deferred 1031 exchange strategies and Delaware Statutory Trust investments. For over 26 years, they have helped investment property owners perform strategic 1031 exchanges by developing and implementing well-planned, tax-efficient transition plans carefully designed to meet their objectives. To learn more about Real Estate Transition Solutions, call 888-286-5395, email [email protected] or visit our website at www.re-transition.com/aoa.
The information herein has been prepared for educational purposes only and does not constitute an offer to purchase or sell securitized real estate investments. Such offers are only made through the sponsor’s Private Placement Memorandum (PPM), which is solely available to accredited investors and accredited entities. Case studies and examples are for illustrative purposes and not representative of future results. There are risks associated with investing in real estate properties, including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies, and illiquidity. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your situation. DST 1031 properties are only available to accredited investors (generally described as having a net worth of over $1 million dollars exclusive of primary residence) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney. Securities offered through Aurora Securities, Inc. (ASI), member FINRA/SIPC. Advisory services offered through Secure Asset Management, LLC (SAM), a registered investment advisor. ASI and SAM are affiliated companies. Real Estate Transition Solutions (RETS) is independent of ASI and SAM.