Understanding 1031 Exchanges

In “1031 Exchange Solutions and Investing in Private Placements,” Inland’s Jackie Barbera led a very interactive session at NAR Expo 2016 on the hot topic of 1031 exchanges. IRS Section 1031 is a capital gains tax shelter, originally created in the 1920s to benefit farmers, and it is responsible for a great deal of real estate transaction volume where property is exchanged, on a special timetable, for property of a “like kind” using a qualified intermediary.

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What’s a qualified intermediary and why is one necessary? Because under 1031, the seller cannot receive nor control the net sale proceeds. To take advantage of 1031, sellers require a third party, an intermediary. As this part of the industry is not regulated, great care must be taken to select a trustworthy QI. Barbera told the story of a half-million dollar 1031 transaction where a shady QI had placed the funds in an investment that tanked over the weekend, forcing a loss on the seller, who could only recover 85 cents on the dollar.

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In a very animated Q&A session, it came up that 1031 Exchanges can only apply to domestic properties. They are recognized, says Barbera, by all states except Pennsylvania. They are also not recognized by Puerto Rico, although the US Virgin Islands does recognize them.

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