Passive Real Estate Investing with a 1031 Exchange

If you're considering transitioning from active property management to a more passive approach, it's important to explore your options. One effective strategy to defer taxes on your relinquished property is through a 1031 Exchange. However, it's worth noting that the landlord responsibilities for qualifying replacement properties can vary significantly based on how you own the exchanged property.

To achieve tax deferral in a 1031 Exchange, a taxpayer must exchange real property for other "like-kind" real propertyf. There are generally four ownership options to consider that qualify for 1031 Exchange tax deferral while providing limited or no landlord responsibilities and striving to generate income. In this article, we will explore these four passive income ownership options and discuss the pros and cons associated with each.

By understanding these options, you can make an informed decision about the your passive real estate investment strategy.

Passive Income Replacement Property

For 1031 Exchangers seeking passive income, there are various ownership models to choose from. It's important to note that there is no one-size-fits-all model that suits every individual or situation. The ownership model you select should align with your specific goals. Here is a summary of the pros and cons associated with four common ownership options for your 1031 Exchange.

Delaware Statutory Trusts (DSTs):

DSTs have gained popularity for passive real estate investing. They offer portfolio diversification, low minimum investments, and similar benefits to direct property ownership. Through a 1031 Exchange, investing in a DST qualifies as a replacement property, allowing you to defer capital gains on your sale proceeds.

With a DST, investors own fractional interests in properties within the trust, providing diversification. DSTs cater to various types of investors and often enable them to own fractional shares of larger institutional properties that may be unaffordable individually. These properties can include multi-family apartments, net-lease retail properties, self-storage facilities, medical office buildings, industrial properties, student housing, senior housing, or memory care facilities.

In addition to passive income potential, DSTs offer several potential benefits. These include professional property management, limited liability for investors, access to low-cost non-recourse debt, quick closing times (typically 3 to 5 days), and the ability to continue benefiting from annual depreciation write-offs to reduce income tax burden.

Note: It's essential to carefully evaluate DST offerings, consider risks, and consult with qualified professionals before making investment decisions.

Other ownership options and their pros and cons will be covered in the subsequent parts of this guide.

DSTs (Delaware Statutory Trusts)

Young female real estate agent congratulating buyer on new apartment purchase representing passive income and 1031 exchange in real estate through Delaware Statutory Trusts DSTs

Landlord Duties: NONE


  1. Fractional Ownership of Assets: DSTs allow investors to own fractional interests in institutional-grade properties, providing access to high-quality real estate assets.
  1. Institutional-grade Property: DSTs typically offer properties that are professionally managed and maintained, providing investors with exposure to well-managed and desirable assets.
  1. Multiple Property Types: DSTs cover a range of property types, including multi-family apartments, net-lease retail, self-storage, medical office, industrial properties, student housing, senior housing, or memory care. This variety allows investors to diversify their holdings within the DST.
  1. Portfolio Diversification: Investing in DSTs allows for diversification across different properties and markets, potentially reducing the risk associated with concentration in a single property.
  1. Non-Recourse Debt Matching: DSTs provide access to non-recourse financing, allowing investors to match the debt on the replacement property with their investment, which can enhance cash flow potential.
  1. Low Investment of $500K: DSTs often have a lower minimum investment requirement compared to directly owning a property, making it accessible to a broader range of investors.


  1. Must be an Accredited Investor: To invest in a DST, investors must meet specific criteria to qualify as an accredited investor, which typically includes having a high net worth or meeting certain income thresholds.
  2. Lack of Control & Liquidity: Investors in DSTs have limited decision-making control over the property, as the day-to-day management is typically handled by a professional asset manager. Additionally, DSTs have limited liquidity options compared to direct property ownership.
  3. Loan Modifications Not Possible: Investors in DSTs do not have the ability to modify or renegotiate the terms of the existing loan on the property, as these decisions are made at the trust level.
  4. It's important to thoroughly research and consider these factors, along with any specific risks associated with a particular DST offering, before making investment decisions. Consulting with professionals experienced in DST investments can provide further guidance and insights.

The minimum investment for a DST is usually $100,000, allowing for greater accessibility to a broader range of investors. Some investors choose to further diversify their portfolios by investing in multiple DSTs. However, to invest in a DST, you must meet the accredited investor requirements. This typically entails having a net worth of at least $1 million (excluding your primary residence) or an annual income of $200,000 ($300,000 with a spouse or partner) for the previous two years and anticipated for the current year.

One downside of investing in a DST is the loss of control over the asset as a fractional owner. Investment and property management decisions are made by the trustee or investment manager, and individual investors do not have a direct say in those decisions. Additionally, DST investments are relatively illiquid. While there is a secondary market, it's advisable to plan for the investment duration of the trust, which typically ranges from five to ten years.

It's important to carefully evaluate these factors, assess the specific terms and conditions of each DST offering, and consider the potential risks involved before making investment decisions. Consulting with professionals experienced in DST investments can provide valuable insights and guidance.

Triple Net Lease (NNN)

Family couple moving out of apartment indicative of real estate shift and potential for passive income and 1031 exchange through a Triple Net Lease NNN

One common challenge of owning rental real estate is the responsibility for various ownership costs, such as property taxes, building insurance, and maintenance. However, with a Triple Net Lease property, the tenant assumes the responsibility for all of these expenses throughout their lease term. If you have an outstanding mortgage on the property, your only expense would be the monthly mortgage payment.

Triple Net Leases typically have longer terms, often ranging from 10 to 15 years, and often include rent escalation clauses. These clauses ensure that your rental income increases each year by a predetermined amount, providing a potential source of steady income growth. Commercial properties, including office buildings, shopping malls, or freestanding buildings operated by banks, restaurants, or major retailers, commonly utilize Triple Net Leases.

The monthly rent from the tenant in a Triple Net Lease arrangement tends to be lower compared to other properties. This is because the tenant assumes the risks and responsibilities associated with property upkeep and expenses. By transferring these obligations to the tenant, the property owner can potentially have a more hands-off approach to property management while still benefiting from a reliable rental income stream.

Triple Net Lease (NNN)

Landlord Duties: LIMITED


  1. Direct Ownership of Assets: With a Triple Net Lease, the property owner retains direct ownership of the property while transferring most ownership costs and responsibilities to the tenant.
  1. Often Utilized by DST Sponsors: Triple Net Lease properties are commonly utilized by sponsors of Delaware Statutory Trusts (DSTs) as replacement properties in 1031 Exchanges, providing investors with potential opportunities for passive real estate investment.
  1. Long-term Lease Agreements: Triple Net Leases typically have longer lease terms, ranging from 10 to 15 years or even longer. This can provide the potential for stability and predictability in rental income for the property owner.
  1. Built-in Rent Escalation Clauses: Lease agreements often include rent escalation clauses, allowing for predetermined annual rent increases. This can help to protect against inflation and potentially increase rental income over time.
  1. Tenant Pays all Repair Costs: Under a Triple Net Lease, the tenant is responsible for paying all property expenses, including property taxes, building insurance, and maintenance costs. This reduces the landlord's financial burden associated with property ownership.
  1. Corporate Tenants are Common: Triple Net Leases are frequently used by corporate tenants, such as banks, restaurants, or major retailers. These tenants tend to have strong credit profiles, providing additional reassurance for landlords.


  1. Vacancy & Tenant Default Risks: Like any rental property, there is a risk of potential vacancies and tenant defaults, which can impact rental income and require finding new tenants.
  2. Rent Increases May Lag Markets: Rent escalation clauses may have predefined annual increases that could potentially lag behind market rental rates. This may result in missed opportunities for higher rental income during periods of market growth.
  1. High Investment Minimums: Triple Net Lease properties often require higher minimum investments compared to other real estate investments, which can limit accessibility for some investors.

A downside of Triple Net Lease properties is that investors remain responsible for property expenses if tenants default or the building is vacant. Cash reserves should be set aside to mitigate this risk. Additionally, full ownership of a Triple Net Lease property often requires a significant investment, tying up a substantial amount of capital in a single property.

Furthermore, in a rental market with increasing demand, long-term lease contracts may result in rental income falling below current market rates. Careful evaluation and consideration of these factors are essential when investing in Triple Net Lease properties.

Tenants-in-Common (TICs)

Tenants-in-Common (TICs) is a structure that allows up to 35 investors to collectively purchase real estate. In a TIC agreement, investors directly source, acquire, and operate the property, often involving institutional-quality properties with professional management. This means that investors can rely on responsible managers who handle day-to-day responsibilities on their behalf.

Investing in TICs provides the flexibility to diversify investments across multiple properties, allowing investors to 1031 Exchange their sale proceeds into different TICs. This diversification can encompass various geographic locations, occupancy types, and asset management strategies. Each investor receives a fractional fee simple interest in the property based on the size of their investment.

TIC investments offer freedom from the daily management of properties and provide an income stream from high-quality institutional assets. Investors also benefit from receiving a proportionate share of net income, tax advantages, and potential appreciation. Investors can hold their interest in a TIC as individuals, joint tenants, or through a Limited Liability Company (LLC).

A limitation of Tenants-in-Common investments is that they are generally not permitted to act as business entities.

TICs (Tenants-in-Common)

Landlord Duties: LIMITED


  1. Fractional Ownership of Assets: TICs allow investors to have fractional ownership in institutional-grade properties, providing access to high-quality real estate assets.
  1. Up to 35 Partner Investors: TICs allow for pooling resources with up to 35 partner investors, enabling collective purchasing power and shared responsibilities.
  1. Institutional-grade Property: TICs typically involve institutional-quality properties with professional management, providing investors with access to well-maintained and desirable assets.
  1. Portfolio Diversification: Investing in TICs allows for diversification across multiple properties, offering the opportunity to spread investments geographically, across occupancy types, and asset management strategies.
  1. Non-Recourse Debt Matching: TICs provide access to non-recourse financing, allowing investors to match the debt on the property with their investment, potentially enhancing cash flow potential.
  1. Earnings Based on Ownership: Investors in TICs receive earnings proportional to their ownership interest, providing a direct correlation between their investment and any income generated by the property.


  1. Complex Ownership Liquidation: Liquidating or selling a TIC investment can be more complex compared to other forms of real estate ownership, as it involves coordinating the interests of multiple investors. This process can be time-consuming and may require unanimous consent from all co-owners.
  1. Limited Control of Assets: In a TIC structure, investors have limited control over the day-to-day management and decision-making of the property. While professional managers handle the operations, investors may have limited influence or input on property-related decisions.
  1. High Investment Minimums: TIC investments often require a significant minimum investment, typically starting at $1 million or higher. This higher investment threshold may limit accessibility for some investors.

A limitation of TICs is that investors cannot file TIC tax returns, conduct business through a common name, borrow money, or enter into contractual agreements as a TIC entity. Additionally, TICs typically offer a right of first refusal if an investor decides to sell their ownership interest. However, if a suitable buyer is not found, the investor is generally free to sell to any interested party. It's important to note that selling to an undesirable co-owner could potentially have a negative impact on the investment.

Private REITs

Private REITs, like their publicly traded counterparts, are investment vehicles that pool investor funds to acquire a portfolio of real estate properties. However, unlike publicly traded REITs, private REITs are not subject to Securities and Exchange Commission (SEC) registration and are not publicly traded.

Private REITs often focus on specific geographical areas or types of real estate, such as hotels, apartments, or senior care living. While they lack the liquidity of publicly traded REITs, private REITs can offer investors a diversified real estate portfolio, access to professional management, and the opportunity to invest in assets that may otherwise be out of their financial reach.

It's important to note that private REITs are not subject to the same disclosure requirements as publicly traded stocks or public non-listed REITs. Investors should carefully consider the risks and perform due diligence before investing in private REITs, as the lack of public scrutiny and liquidity can introduce additional considerations.

Consulting with professionals experienced in real estate investments and private REITs can provide valuable guidance and help investors make informed decisions based on their investment objectives and risk tolerance.

Private REITs

Landlord Duties: NONE


  1. Fractional Ownership of Assets: Private REITs allow investors to have fractional ownership in institutional-grade real estate properties, providing access to high-quality assets.
  1. Institutional-grade Property: Private REITs typically invest in institutional-quality properties, which are professionally managed and maintained.
  1. Higher Dividend Yield vs. REITs: Private REITs may offer higher dividend yields compared to publicly traded REITs, potentially providing attractive income opportunities for investors.
  1. Portfolio Diversification: Investing in private REITs allows for diversification across multiple properties and property types, reducing risk through spreading investments.
  1. Lower Investment Minimums: Private REITs often have lower investment minimums compared to other real estate investments, making them more accessible to a broader range of investors.
  2. Limited SEC Requirements: Private REITs are exempt from SEC registration and the associated disclosure requirements, providing more flexibility and potentially reduced regulatory burdens.


  1. Must be an Accredited Investor: To invest in private REITs, investors must meet accredited investor requirements, which typically include having a high net worth or meeting certain income thresholds.
  1. Lack of Control & Liquidity: Investors in private REITs have limited control over property management decisions, and liquidity options may be limited compared to publicly traded REITs.
  1. Dividends Taxed as Income: Dividends received from private REITs are generally taxed as ordinary income, which may impact the overall tax liability for investors.

Private REITs are known for offering higher dividend yields compared to public REITs. They also have lower compliance costs since they are exempt from SEC reporting requirements. However, due to regulations, private REITs can only be sold to accredited investors and qualified institutional buyers.

The lack of public trading also means that private REITs are less liquid. Minimum investment amounts typically start at around $25,000.

It's important to note that investing in a REIT, whether private or public, differs from other real estate investments. Investors do not benefit from tax advantages like depreciation and loss carry-forwards that are typically associated with direct real estate investing.

Additionally, to qualify as a REIT, the entity must distribute at least 90% of its taxable income to investors. These distributions are considered ordinary income, which is usually subject to higher tax rates. As a result, many investors choose to invest in REITs through tax-deferred accounts, such as an IRA, to mitigate the tax impact.

In Conclusion

As a real estate investor considering a 1031 Exchange, there are important factors to consider when selecting your reinvestment options. These factors include your desired level of involvement in property management, the taxation of your income, and your preference for fractional or sole ownership. Making informed decisions regarding these aspects can be challenging without proper guidance. It is recommended to seek professional guidance to navigate these considerations effectively and strive to ensure the best outcome for your investment.

When considering investing in private REITs, thorough due diligence and consultation with professionals experienced in real estate investments and tax planning are crucial to make informed decisions aligned with investment goals and tax strategies.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Trading Up Could Result in Depreciation

The term "useful life" of real estate is what is meant when people talk about depreciation. Depreciation is a mechanism that might potentially lessen the amount of taxable income you make from investment real estate. In general, a residential rental property will have a depreciation schedule of 27.5 years, while a commercial property will normally be deemed to have a schedule of 39 years. What happens, therefore, if you have been the owner of your investment property for a good number of years and you have exhausted all of the depreciation that you were able to claim on your income property?

Performing a 1031 exchange could provide you with the opportunity to get a new depreciation schedule from an asset that has already been fully depreciated, which could in turn lead to a reduction in the amount of income that is subject to taxation. However, simply engaging in a 1031 exchange is not sufficient on its own; for the 1031 exchange to be valid, the newly acquired property must have a higher value than the property that is being sold.

For instance, if you sold a property worth $500,000 that had been fully depreciated and then purchased another property for the same amount, you would not gain a new depreciation schedule because the previous cost basis would transfer to the newly acquired property. This would prevent you from gaining a new depreciation schedule. If, on the other hand, you sold your home for $500,000 and then bought another property for $1,000,000 afterward, then you would have increased your cost basis and would be eligible to deduct the newly acquired higher cost.

Delaware Statutory Trusts, sometimes known as DSTs, have the potential to be an excellent answer for those who are interested in engaging in a 1031 exchange but would also wish to "trade up" their cost basis and depreciation schedule. Perch Wealth is able to provide accredited investors with direct share transactions (DSTs) that include pre-existing, non-recourse financing.


This may make it possible for the accredited investors to plan how they want their exchange to be structured and may also make it possible for them to discover a way to legally shelter more of their income by increasing their cost basis. We are also able to provide investors with debt-free DSTs, which can be included in a diversified investment portfolio, or if investors simply want to remain debt-free on their real estate assets. These debt-free DSTs can be used for a variety of purposes.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Understanding a "Like-Kind" Exchange's Holding Period

Every investor must adhere to rigorous deadlines in order to effectively conduct a 1031 exchange. However, investors frequently inquire as to whether a property must be held for a specific period of time in order to be eligible for an exchange. Although the IRS hasn't stated a holding time specifically, a few factors could shed light on the matter.

During the 1031 Holding Period

How long an investor keeps a piece of property is known as the holding period. IRC Section 1031 does not specify the length of the holding period, as was previously indicated. Instead, it depends on the investor's goals.

No gain or loss shall be recognized on the exchange of property held for productive use in a business, according to the IRS.

"Even though properties vary in grade or quality, they are still of the same sort if they have the same nature or character.

Whether they are renovated or unimproved, real estate properties are often of a like kind. An apartment building would often be similar to another apartment building, for instance. However, real estate within the United States is not comparable to real estate outside.


Recognizing Intent

The goal of Section 1031 is to make it possible for investors who have owned their property for a long time, particularly those who did so for income-producing purposes, to exchange it for another property that would serve the same function.

Since not all real estate is owned for the same purpose, not all of it is eligible. A primary residence is the most frequent case that should be considered. A primary residence does not qualify for an exchange since it is not "kept for productive use in a trade or industry or for investment." On the other hand, because they are held as investments, residential complexes, office and medical buildings, shopping malls, and single-tenant assets typically qualify.

In order to achieve a 1031 exchange, developers must overcome additional obstacles. Purchasing land, constructing a property, and then selling it for a profit frequently disqualifies a transaction from a 1031 exchange since a property must be held for investment purposes. In this case, the property was held for profit-making purposes rather than as an investment.

If investors are unsure whether the property will satisfy Section 1031, they should think about holding it for at least one year, if not two.

Even while the IRS has never explicitly said that there must be a minimum hold period, there have been instances where the IRS refused to allow an exchange because the owner's intent was ambiguous.

Investors who are unsure of their eligibility may choose to follow the two-year advice in general. However, as always, consult with a tax expert to receive their opinion on your specific case. The IRS referred to the two-year holding term in Private Letter Ruling 8429039 from 1984. The letter was written in response to a request for an exchange from an investor who wished to sell his property. Until 1981, the subject property served as the investor's primary residence. The investor leased out the property in 1983. The IRS granted the investor's request for a 1031 exchange in 1984, noting that keeping rental property for at least two years satisfies the holding period test required by Section 1031. But since a private letter ruling only applies to this specific instance, it may only be regarded as a general recommendation for 1031 exchanges.

The one-year holding consideration, on the other hand, was first proposed by Congress in 1989 as a requirement for a property to be eligible for a 1031 exchange. However, because this suggestion was never included in the Tax Code, it is not necessary. Instead, in order to determine whether a property would be eligible under Section 1031, tax professionals have referred to this idea.

The fact that the investment will appear on one's taxes as an investment property for two filing years if it is held for at least a year is another factor for the one-year holding period.

Nevertheless, these factors are but that—factors. In the past, the IRS has made choices on like-kind exchanges that do not support these ideas. For instance, in the case Allegheny County Auto Mart v. C.I.R. from 1953, the court allowed an investor to complete a 1031 exchange even though they had only owned the property for five days. However, in other cases, like Klarkowski v. Commissioner from 1967, an investor was still ineligible even after six years of ownership.

Is a vacation home acceptable?

Those who own property as a vacation home can often sell it and buy a new property via a 1031 exchange, however this is typically how commercial investors talk about 1031 exchanges. The vacation home must, however, have tenants, and it must be managed like a company. In addition, if the vacation home is purchased as the replacement property, the investment-related use of the property must continue. The property can usually not be turned into a primary residence within five years of the exchange.


Additional 1031 Exchange Timelines That Are Important

Investors must be aware of and abide by the deadlines specified in Section 1031 in order to be eligible for a like-kind exchange.

There is no time limit on how long an investor has to sell an asset after it is put on the market. They can market it for one day or five years and sell it on or off the open market. In reality, they have the option to list the asset before deciding otherwise. Any gains are unrealized until the property is sold. A timetable doesn't begin until the property actually closes, and the investor may be liable for paying taxes on the realized gains.

An investor has 45 days to choose their replacement property and 180 days to close after the initial property, or surrendered property, closes. The 180-day period begins on the same day as the property's closure. With very few exceptions, every exchange that doesn't take place by these dates has all gains subject to taxation.

Speak with a Professional You Can Trust

Speaking with a trained professional is highly advised for anyone considering selling their real estate and buying a new property via a 1031 exchange. Many 1031 swaps have distinct looks. In addition to providing insight on the potential exchange, 1031 experts can lead investors to other 1031 exchange investment opportunities that might otherwise go unnoticed.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

The Importance of a QI in Your 1031 Exchange

A qualified intermediary (QI) is required for all 1031 exchanges. Given the importance of the QI in an exchange, it is imperative for real estate investors to identify one they can trust and rely on. Achieving this, however, can be difficult – how does an investor know whether a particular QI is credible? Here is a brief tutorial on how to select a reputable QI for a 1031 exchange.

What is a QI?

A QI, also known as an accommodator, is an individual or entity that facilitates a 1031, or like-kind, exchange as outlined in Internal Revenue Code (IRC) Section 1031. The role of a QI is defined in the Federal Code as follows:

A qualified intermediary is a person who -

(A) Is not the taxpayer or a disqualified person, and

(B) Enters into a written agreement with the taxpayer (the “exchange agreement”) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. (26 CFR § 1.1031(k)-1)

An individual does not need to meet any eligibility requirements or acquire a license or certificate to become a QI. However, the Internal Revenue Service (IRS) does stipulate that anyone who is related to the exchanger or has had a financial relationship with the exchanger – such as an employee, an attorney, an accountant, an investment banker or broker, or a real estate agent or broker – within the two years prior to the sale of the relinquished property is disqualified from acting as the exchanger’s QI.

Why is having a QI important in a 1031 Exchange?

Every 1031 exchanger must identify a QI and enter into a written contract prior to closing on the relinquished property. Once selected, the QI has three primary responsibilities: prepare exchange documents, exchange the properties, and hold and release the exchange funds.

Preparing Exchange Documents

Throughout the exchange, the QI prepares and maintains all relevant documentation, including escrow instructions for all parties involved in the transaction.


Exchanging Properties

A 1031 exchange requires the QI to acquire the relinquished property from the exchanger, transfer the relinquished property to the buyer, acquire the replacement property from the seller, and transfer the replacement property to the exchanger. Although the QI also transfers the title, the QI does not actually have to be part of the title chain. 

Holding and Releasing Exchange Funds

For an exchanger to defer capital gains, all proceeds from the sale of the relinquished property must be held with the QI; any proceeds held by the exchanger are taxable. Therefore, the QI must take control of the proceeds from the sale of the relinquished property and place them in a separate account, where they are held until the purchase of the replacement property.

Exchangers must meet two key deadlines for the exchange to be valid. The first comes at the end of the identification period. Within 45 calendar days of the transfer of the relinquished property, the exchanger must identify the replacement property to be acquired. The second comes at the end of the exchange period. The exchanger must receive the replacement property within 180 calendar days of the transfer of the relinquished property. These deadlines are strict and cannot be extended even if the 45th or 180th day falls on a Saturday, Sunday, or legal holiday.

What should investors consider when choosing a QI?

Since a QI is not required to have a license, investors should conduct due diligence to ensure they select an individual who can properly manage the 1031 exchange. Unfortunately, the IRS does not excuse any errors committed by a QI, and, as a result, investors may be required to pay taxes on the exchange due to these mistakes. Here are a few things investors should consider when selecting a QI.

State Regulations

While the federal government does not regulate QIs, some states have enacted legislation that does. For example, California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia, and Washington have all passed laws overseeing the industry. Many of these states have requirements for licensing and registration, separate escrow accounts, fidelity or surety bond amounts, and error-and-omission insurance policy amounts.

Federation of Exchange Accommodators

The Federation of Exchange Accommodators (FEA) is a national trade association that represents professionals who conduct like-kind exchanges under IRC Section1031. The FEA’s mission is to support, preserve, and advance 1031 exchanges and the QI industry. Association members are required to abide by the FEA’s Code of Ethics and Conduct.

In addition, the FEA offers a program that confers the designation of Certified Exchange Specialist® (CES) upon individuals who meet specific work-experience criteria and pass an examination on 1031 exchange laws and procedures. Holders of this certificate must pass the CES exam and meet continuing education requirements. The “designation demonstrates to taxpayers considering a 1031 exchange that the professional they have chosen possesses a certain level of experience and knowledge.”

Knowledge and Experience

As mentioned, a QI’s mistake in a 1031 exchange can result in a taxable transaction. Investors who are in the process of selecting an accommodator should review each individual’s qualifications – including knowledge and experience in the industry – before making a final decision. Investors should inquire whether the individual is full- or part-time; how many transactions and how much in value the individual has facilitated. Additionally, it is important to know whether the individual has any failed transactions and, if so, why.

Knowledge about 1031 exchanges is critical. Not only should potential QIs know the basics, but they should understand the ins and outs of the 1031 exchange process. For example, QIs should know what qualifies as a like-kind property. Likewise, they should know about Delaware Statutory Trusts (DSTs), one of the most commonly overlooked alternative 1031 exchange solutions. Unfortunately, many QIs are not familiar with DSTs. Finding a knowledgeable and experienced QI is crucial for investors who want to successfully defer capital gains while continuing to meet their overall financial objectives.


How should an investor go about selecting a QI?

To find a QI in good standing, investors should seek referrals. Word of mouth can be a great way to find a credible QI. Investors can ask for a referral from a certified public accountant (CPA) with 1031 exchange experience, a real estate attorney, a reputable title company, or even the other party in the exchange.

When vetting a potential QI, investors need to ask questions that will reveal the individual’s depth of knowledge and experience – beyond just the basics. For instance, the FAE requires potential QIs to work full-time for at least three years before they can even sit for the CES exam. Three years is a good baseline to start from when judging a QI’s experience; five to 10 years is a solid amount.

Finding a QI is one of the most critical parts of a 1031 exchange, as the transaction cannot be completed without one. Investors must ensure that their QI is experienced and thoroughly understands the various tax codes involved. Investors also need to ensure that the QI has not been financially connected to them within the past two years and is not a relative, employee, or agent. The IRS does not take these factors lightly; failure to comply with what is presented here may lead to hefty penalty fees – or the IRS may prohibit the exchange from occurring altogether.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure: