1031 Exchange – Due Diligence Selecting a Qualified Intermediary

 In 1031, California, Columbus, Commercial, investing, real estate

I haven’t written much about 1031s over the last year or so, but given the 50% increase in capital gains taxes in many circumstances and the 3.8% Net Investment Tax, there’s been a 50% increase in 1031 exchanges over the last year.  I think the number would be even higher if it weren’t the fact that suitable replacement properties are so rare.

Just like the last boom and bust cycle and every one before that, we’ll get to bubble pricing again and then an eventual bust.  If you’re going to try to time the peak of the market and sell and replace via a 1031 exchange, be very careful to do your due diligence on the 1031 Qualified Intermediary you choose.

There were several 1031 intermediaries that failed during the last crash and if the one you choose fails you not only risk losing all of the cash you had with the qualified intermediary, but could be contractually obligated to complete the purchase of your replacement property.  In addition, you’re likely to be held responsible for the capital gains due to the IRS.

“On June 6, 2008, the Office of Chief Counsel at the IRS responded that taxpayers are not able to defer gain in a 1031 exchange if they do not buy replacement property within the 180-day exchange period, even if the reason for the failure to buy replacement property within the 180-day period is due to the bankruptcy of the intermediary. In other words, the IRS does not give any special treatment to investors who have lost their money because of a failed exchange company”

There’s a lot riding on you doing your 1031 exchange correctly with a reliable, proven and safe intermediary.

Due Diligence When Recommending a QI (173)

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