Entering a 1031 exchange involves working with various professionals, some to help facilitate a smoother exchange and some to help ensure compliance with the IRS rules. Among the many entities you’ll encounter will be a title company experienced in 1031 exchanges. The professionals here play a distinct role in documenting the transaction to help support a successful exchange. Below, Realized 1031 has shared a guide discussing the role of the title company, how it compares to a qualified intermediary, and how to choose one based on your needs. Keep reading to learn more.
Named after Section 1031, the 1031 or like-kind exchange is a type of tax-deferred transaction that allows real estate investors to defer recognition of capital gains taxes by reinvesting the proceeds from the sale of an investment property into another qualifying property. One key requirement is that the taxpayer must not receive or control the sale proceeds. Instead, a qualified intermediary holds the funds and uses them to acquire the replacement property. This prevents constructive receipt, which would otherwise trigger a taxable event.
Title companies often play a supporting role in this process—handling escrow, conducting title searches, and working with a qualified intermediary to ensure that the transaction closes properly. While not responsible for compliance, their coordination is often essential for a successful exchange.
What is a 1031 exchange title company? A title company is typically a title and escrow firm that facilitates real estate closings. In some cases, the company may have a separately structured affiliate that offers 1031 exchange services as a qualified intermediary (QI). To serve in this capacity, the affiliate must meet specific IRS requirements and maintain operational independence.
Even when not acting as the QI, a title company may assist in coordinating transaction documentation, handling escrow, and working with the QI and taxpayer to help ensure that the logistics of the exchange align with IRS rules. However, the taxpayer remains ultimately responsible for compliance with Section 1031 and related Treasury regulations.
Here are the distinct roles a title company may play in a 1031 exchange transaction:
Just like in a traditional real estate transaction, the title company manages the escrow process and closing logistics. In a 1031 exchange, sale proceeds must be directed to a qualified intermediary (QI) to avoid constructive receipt. The title company helps implement these instructions, but is not responsible for tax compliance.
A title company also conducts research to verify facts such as ownership and any attached tax liens on the property. This helps you resolve some potential legal problems that could potentially delay or even prevent the sale. When necessary, the title company can issue insurance to protect the buyer or lender from future claims.
The like-kind exchange must happen within 180 days, as set by the IRS. The title company may assist your qualified intermediary to monitor these timelines and ensure that you’re filing paperwork (such as property identification) within the set deadlines. The investor is ultimately responsible for meeting all time-sensitive requirements
Title companies prepare and manage transaction documents such as deeds and escrow instructions. While they do not handle IRS filings, their documentation supports the legal validity of the real estate transfer.
In reverse exchanges, a separate Exchange Accommodation Titleholder (EAT)—sometimes affiliated with the title company—may hold the replacement property temporarily. This arrangement helps prevent disqualifying ownership overlap and aligns with IRS guidance
While title companies and qualified intermediaries (QIs) often coordinate during a 1031 exchange, they serve entirely separate roles. The qualified intermediary is a non-negotiable requirement for the like-kind swap as they serve a key role in handling sales proceeds.
By contrast, the title company facilitates closing, performs title searches, holds escrowed funds (not exchange funds), and issues title insurance. Although title companies are not legally required for a 1031 exchange, it is highly unusual—and risky—not to use one, as they ensure clean title and proper closing procedures.
Selecting a title company is an important step in your 1031 exchange. Here are a few criteria to consider.
Among the various professionals and teams you’re going to work with during a 1031 exchange, the title company remains an important entity. They conduct title searches, issue title insurance, and coordinate with other parties to help facilitate the transaction. In some cases, they may work with affiliated entities that serve as Exchange Accommodation Titleholders (EATs) in reverse exchanges.
While they are not responsible for IRS compliance, a knowledgeable title company can support the transaction by coordinating documentation and timelines with your qualified intermediary. For most investors, engaging a Qualified Intermediary is essential to help ensure a smooth and compliant 1031 exchange, while a title company may assist with the closing process.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/terms/r/reverse-exchange.asp
https://www.rocketmortgage.com/learn/what-does-a-title-company-do