The successful execution of a 1031 exchange can allow an investor to defer payment of capital gains taxes. This tactic can help you leverage your investment capital, but to obtain approval from the IRS, you must carefully follow the rules governing the 1031 exchange transaction. If you make a mistake, the IRS may disqualify the exchange, resulting in you having to pay the capital gains taxes immediately.
Real estate investors who complete like-kind exchanges to defer capital gains taxes on the sale of highly appreciated assets have to follow a stringent set of rules set forth by the Internal Revenue Service. Foremost among those regulations is the use of a Qualified Intermediary (QI) to facilitate all aspects of the 1031 exchange.
Successfully completing a 1031 exchange requires meticulous attention to detail. Exchangors don’t have to worry about navigating every single detail of their exchanges, however – that job falls on the Qualified Intermediary.
When hurricane Ian hit southwest Florida in late September of 2022, it destroyed more than 5,000 homes in Lee County and severely damaged another 13,000 residences.1 The damage wrought by Ian left thousands of homeowners pondering their next steps. Homeowners and investors who owned condemned properties may be able to complete a 1033 exchange to replace homes that were destroyed or severely damaged by the hurricane’s wrath.
The potential benefits of employing a 1031 exchange in your investment strategy are attractive. However, as with many appealing tools, investors should be careful and precise in using this one. Since structuring a real estate transaction using the exchange offers the opportunity to defer capital gains taxes, the IRS requires that taxpayers follow the rules precisely.
A Qualified Intermediary plays an essential role in successfully executing any 1031 exchange. This professional has several critical responsibilities to ensure that the exchange complies with IRS regulations. Perhaps most importantly, the QI takes possession of the proceeds from the sale of the identified property when it is sold and maintains those funds separately from the investor until they are used to complete the exchange into replacement property (or properties).