Eligibility for a 1031 Exchange: Who Can Participate?

A 1031 exchange is a strategy utilized by real estate investors to postpone the payment of capital gains taxes, allowing them to reinvest the full proceeds from the sale of an asset. Fortunately, the Internal Revenue Service (IRS) has established guidelines and regulations that, if meticulously adhered to, permit taxpayers to engage in this process.

The requirements for a successful 1031 exchange are as follows:

Like-Kind Properties: The assets involved in the exchange must be of "like-kind." While the definition of "like-kind" was broader before the Tax Cuts and Jobs Act (TCJA), which imposed limitations, the exchange now primarily applies to business properties. However, almost any income-producing property can qualify. For instance, you can sell a residential rental property and reinvest in an office building, or sell an office building and reinvest in retail properties. The exchange allows for flexibility in altering your real estate portfolio's composition, focusing on different geographic regions or sectors to maximize investment potential.

It is important to note that personal-use properties, such as primary residences or second homes, do not qualify for a 1031 exchange.

1. Qualified Intermediary (QI): To facilitate the exchange, a Qualified Intermediary (QI) must be involved. The QI is an independent third party responsible for holding the proceeds from the sale of the relinquished property and ensuring they are properly transferred to acquire the replacement property. Their involvement is crucial to maintain compliance with IRS regulations and avoid direct receipt of the funds by the taxpayer, which would disqualify the exchange.

2. Timeline: Strict timelines must be followed during a 1031 exchange. The taxpayer has 45 days from the sale of the relinquished property to identify potential replacement properties. Subsequently, the acquisition of the replacement property must be completed within 180 days from the sale.

1031-exchange eligibility requriements IRS regulations, and tax deferrals.


There are several important restrictions to be aware of when engaging in a 1031 exchange:

1.   Value and Debt Replacement: One key requirement is that the investor must replace both the value and the debt level of the relinquished property. For example, if you sell a property worth $400,000 with a mortgage of $300,000, you need to acquire one or more new assets with a combined value and debt equal to or greater than those amounts. Failure to meet this requirement can result in disqualification from the exchange and potential capital gains tax liability.

2.   Timeline: Once the relinquished property is sold, the investor has a tight timeframe to complete the exchange. Within 45 days of the sale, the investor must formally identify potential replacement properties. The acquisition of the replacement property must then be completed within 180 days, including the initial 45-day identification period. Meeting these strict deadlines is crucial to maintain eligibility for the tax-deferred exchange.

3.   Options for Replacement Property Identification: There are three options available for successfully identifying and acquiring replacement properties:

Option 1: Identify up to three potential replacement properties, without any restrictions on their individual or total value. Ultimately, the investor must purchase one or more of these properties and ensure that both the value and debt level of the relinquished property are replaced.

Option 2: Identify an unlimited number of properties, but their combined value cannot exceed 200% of the original asset's value. Similar to the first option, the investor must purchase one or more of these properties to satisfy the value and debt replacement requirements.

Option 3: Identify any number of properties during the allowable period, but the investor must acquire properties with a combined market value of at least 95% (equal to or greater than) the cost of the relinquished property. By meeting this threshold, the investor ensures the replacement of both value and debt.

1031-exchanges-new-york-tax cuts and jobs act 2023 resources.

“Can I just do this myself?”

No, you cannot handle a 1031 exchange on your own. According to the rules governing these exchanges, you are required to work with a Qualified Intermediary (QI) or Exchange Accommodator. The role of the QI is to oversee the transaction and ensure compliance with the necessary regulations. They act as a third-party facilitator, safeguarding the proceeds from the sale and managing the exchange process.

The QI establishes a separate account to hold the funds from the sale of the relinquished property, ensuring that you, as the investor, do not have direct access to the proceeds. They also receive the formal identification of potential replacement properties from you and assist in the acquisition of the identified replacement property.

Furthermore, the QI takes charge of collecting and organizing the required documentation throughout the exchange process. Their expertise in the rules and regulations surrounding 1031 exchanges is crucial to ensure that the transaction is conducted correctly.

Typically, the QI charges a flat fee for their services. It is important to select a knowledgeable and experienced QI to handle your exchange properly. Mishandling the transaction or failing to comply with the rules can result in the imposition of capital gains taxes and potential depreciation recapture charges.

Therefore, it is strongly advised to work with a Qualified Intermediary when engaging in a 1031 exchange to ensure a successful and tax-efficient transaction.

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:

Alternative Investment Funds for Cash Investors

Investors today face a difficult market. Interest rates at conventional banks are extremely low. The stock market trades at record highs one day before falling the next as a result of persistent volatility. Understandably, some investors become anxious as the stock market swings back and forth. So what are some alternative investment options for cash investors?

The question of where to turn next arises for cash investors trying to diversify their holdings. Unsure of what to do, some people choose to take no action. According to some estimates, $14 trillion is currently lying in money market accounts earning next to nothing. Better options must exist, and they do.

This article examines macroeconomic investing trends as well as some of the various investment options available to people looking to diversify their portfolios using real estate.

Trends in the Market Today

The average return on high-yield bonds was just 3.32 percent between 2011 and 2020. (source: Morningstar Direct, Standard & Poors, Yahoo Finance, Federal Reserve Economic Data). In comparison to investment grade bonds, Treasury bonds, and Treasury bills, which generated average returns of 1.42%, 0.92%, and 0.09%, respectively, during this period, high-yield bonds are typically seen as one of the "better" investments. In conclusion, even the bonds with the best performance over the past ten years hardly kept up with inflation.

By making stock market investments, investors haven't done any better. Over the previous 20 years, the average yearly fall in stocks was 16%. (source: Morningstar Direct, S&P 500 maximum drawdowns by year).

Typically, 60% of an investing portfolio is made up of stocks and 40% of bonds. Therefore, it seems sense that investors would want to diversify their holdings. One method to achieve this is by making institutional-quality real estate investments.

Various Investments

An alternative is to put money into a syndicate or fund for commercial real estate. For instance, Delaware Statutory Trusts permit accredited individuals to invest alongside many others in institutional-quality real estate. As a result, the entry barrier is lowered and direct ownership is made possible, with an experienced third-party sponsor managing and supervising the property in all other respects.

Investments in funds, syndications, and DSTs, however, are frequently illiquid. Depending on the planned business plan and hold time, this may require an investor to commit their funds for a period of three to seven years or longer. If they are interested in adding real estate to their portfolios, those who want to preserve additional liquidity opportunities have a few different options.

Periodic Funds

A type of closed-end fund known as an interval fund provides investors with liquidity at predetermined intervals, usually quarterly, semi-annually, or yearly. This implies that shareholders may periodically sell a portion of their shares at a price determined by the net asset value of the fund. Investors may not always be able to sell their shares during a specific redemption period. As a result, interval funds should normally be viewed as long-term investments; yet, they will typically charge a premium for illiquidity.

Real estate is just one of the various assets and asset classes that may be purchased with interval funds. A single interval fund is not constrained to investing in a single asset class; rather, they can do so to diversify their holdings by purchasing a variety of assets.

Trusts that invest in real estate

Real estate investment trusts, or REITs, are businesses that hold and/or manage commercial real estate that generates income. REITs come in a variety of forms. The majority will concentrate on a certain product category (such as retail, hospitality, multifamily housing, senior living facilities, student housing, office, self-storage, industrial, and similar) or geographic area (e.g., commercial real estate in the Northeast vs. Southwest).

A person purchases a share in a REIT when they want to invest in a business that owns and operates rental properties. Shares of publicly traded REITs can be bought and sold just like other equities, even on a daily basis, giving investors a lot of liquidity.

REITs frequently have precise investing criteria. They then make investments in properties that fit such criteria. REITs are obligated by law to distribute 90% of their income as dividends to shareholders.


Funds for Other Income

Investment funds come in dozens, if not hundreds or thousands, of distinct varieties. These include hedge funds, money market funds, mutual funds, bond funds, and equity funds. Through one of these kinds of funds, many investors have started making real estate investments.

A specific type of funds known as a real estate income fund is dedicated solely to real estate investments that provide income. Those wishing to invest cash in sizable commercial real estate portfolios have another entry point in real estate income funds. Retail investors who want to acquire institutional-quality real estate that is otherwise out of their price range find real estate income funds particularly intriguing. A real estate income fund pools money from numerous investors, and its sponsor then manages every aspect of the fund's operations, from due diligence and underwriting to property repairs, stabilization, continuous management, and ultimately sale. A real estate income fund may have various investment minimums and lengthy hold periods depending on its structure; as a result, the invested capital should be regarded as illiquid throughout that hold period.

Examples of Funds Perch Wealth Offers

Perch Wealth offers a number of vehicles for cash investors wishing to diversify their portfolios away from conventional stocks, bonds, and shares. While it is well recognized for its DST services. Here is a list of some of the income funds that Perch Wealth currently offers:

Essential Income Fund for ExchangeRight

A REIT with 254 recognized single-tenant, net-leased properties spread throughout 196 markets and 29 states is called the ExchangeRight Essential Income Fund. Investment-grade and generally recession-resistant tenants like Dollar General, Family Dollar, Walgreens, CVS Pharmacy, Tractor Supply, Hobby Lobby, and Walmart Neighborhood Market were the focus of this $531 million deal. The nature of these enterprises has historically placed them particularly positioned to weather economic uncertainties and periods of economic slump, as seen during the Great Recession and again during the COVID-19 epidemic. Although retail has usually struggled in recent years, Additionally, the portfolio aims to safeguard against inflation by offering the possibility of increasing cash flow distributions supported by long-term leases that guarantee portfolio rent increases during both the primary and option lease periods.

If funds are available, this REIT will make 100% tax-deferred distributions on a monthly basis. This is a great choice for cash investors wishing to add real estate to their portfolios while still maintaining liquidity because the investment requirement is only $25,000.

Trust for VineBrook Homes

The increased demand for single-family rental (SFR) housing is something that VineBrook Homes Trust (VHT) hopes to take advantage of. The fund aims to make investments in workforce housing with modest rents. This tactic depicts how slowly entry-level new homes are built. Less than 9% of newly built homes are currently priced at $200,000 or less. Due to this, many people now have little alternative but to rent as home ownership grows more and more out of reach. From 4,200 units in Q4 2018 to nearly 13,700 SFR homes in Q1 2021, VHT has increased the number of SFRs in its portfolio. The ownership team uses a value-add strategy to upgrade the properties' condition, luring renters prepared to pay top dollar to them. The portfolio has a stabilized occupancy rate of 98.7% and an average rent of $1,044 per house with a typical size of 1,320 square feet.

This REIT is a partnership between NexPoint, which has a multibillion dollar investment platform and extensive value-add knowledge, and VineBrook, whose operators have been managing SFRs since 2007.

VHT is a $1 billion offering with a $50,000 minimum investment for accredited investors. If funds are available, accrued dividends are expected to be made on a monthly or quarterly basis and will be tax-deferred with growth potential. For those looking to invest in a real estate product type that is in high demand, VHT may be a great choice.

Preferred Shares of Bluerock

Investors seeking to invest largely in institutional-quality Class A apartment buildings might think about buying Bluerock Series T Redeemable Preferred Stock. These are shares of the publicly traded Bluerock Residential Growth (BRG) REIT, which owns a variety of extraordinarily high-quality live-work-play apartment communities in some of the top growth markets in the country.

With a low $5,000 investment requirement, Bluerock Preferred Stocks are being offered for as little as $25 per share. If funds are available, the REIT is expected to pay dividends every month.

These redeemable preferred shares offer investors liquidity right now because BRG is a NYSE-listed REIT.

Trust for Cantor Fitzgerald Income

A publicly listed, non-traded REIT, Cantor Fitzgerald Income Trust (CF Income Trust), invests at least 80% of its funds in multifamily, office, industrial, and other income-producing commercial real estate facilities, as well as stabilized, currently income-producing real estate debt (first mortgages, subordinate mortgages and mezzanine capital).

The company concentrates on making investments in long-term, net leased properties in order to minimize ongoing capital expenditures for properties, which are covered by the tenant under the net lease structure and to protect against market cycle volatility. These leases also include rent increases in an effort to further shield the fund from possible inflation.

Additionally, the industrial buildings in the portfolio are well-positioned to profit from the rising need for facilities for e-commerce and logistics. Compared to other real estate product categories, the multifamily portfolio of the fund has strong, risk-adjusted return potential and minimal historical volatility.

The 20% of funds set aside to judiciously purchase and retain securities related to real estate to support the fund's overall investment goals further balances the diversity of CRE assets held by CF Income Trust.

The CF Income Fund has a $2,500 minimum investment requirement for Class D, Class S, or Class T shares. Class I shares demand a larger minimum investment of $1,000,000 per share. If funds are available, the fund anticipates paying distributions to investors each month. Investors looking to invest in a variety of CRE product types, including both debt and equity, will find the CF Income Trust appealing.

Are you prepared to think about investment possibilities that aim to offer higher, more reliable returns on your money? If this is the case, it may be time to think about investing in a high-yield real estate fund. Call us right away. In order to establish which mix of investments would be ideal for you depending on your unique investing objectives, we would be pleased to explore the choices with you.

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: