The 1031 exchange process can be complicated, especially for novice or first-time real estate investors. Completing a successful exchange requires strict adherence to deadlines and other IRS exchange provisions.
While it’s certainly possible to cross the finish line on your own, investors might consider engaging legal counsel to help avoid making any mistakes that could disqualify their exchange and create tax liability from the sale of an investment property.
Why it makes sense to hire an attorney to help with your 1031 exchange
The IRS rules regarding 1031 exchanges are pretty much set in stone -- break any of them, and you’ll likely find yourself with a disqualified exchange and hefty tax liability.
Missteps that an experienced real estate attorney could help you avoid include:
- Failure to identify suitable like-kind replacement assets within 45 days, and closing on them within 180 days
- Acquiring partial interest in a designated replacement property
- Taking receipt of funds from your relinquished asset
- Holding the replacement property for less than one year
- Failure to designate a Qualified Intermediary to hold funds from your 1031 exchange
Attorneys with experience in real property law and 1031 exchanges can help investors bridge any gaps in knowledge about the intricacies of the exchange process and help ensure they follow procedure to complete a successful exchange.
Skills a lawyer could potentially bring to the table include:
- Helping identify qualifying like-kind properties that match your relinquished asset in market value and mortgage.
- Facilitating the purchase of replacement assets prior to the 180-day deadline.
- Offering legal advice throughout the transaction process to help ensure investors always adhere to rules set forth in the 1031 tax code.
In some jurisdictions, an attorney can be designated as your Qualified Intermediary, but it can’t be your regular legal counsel -- IRS rules state that legal counsel can only act as a Qualified Intermediary if he or she has not performed services for the client in the prior two years unless the work is related to a 1031 exchange.
Should you hire an attorney for your 1031 exchange?
Experienced investors who are familiar with the 1031 exchange process might be able to forgo hiring legal counsel and navigate the intricacies of the exchange on their own. Novice and first-time exchangers who might have some uncertainty about how to successfully complete a 1031 exchange would be well-served by adding an experienced real estate lawyer to their exchange team. Ultimately, though, the decision to hire a lawyer to help complete a 1031 exchange rests with the exchanger.
