Real Estate Investors in Michigan consider the 1031 Exchange to help defer taxes, which allow the investor to grow their net worth over time, without taxes slowing the momentum as they exchange and trade-up properties.
It’s helpful to hire a 1031 Exchange Company in Michigan or in any State you find yourself in for guidance. Full disclosure, I have a relationship with Concorde Financial. I know them and think they are a solid and knowledgeable firm when it comes to the 1031 Exchange process, which can be complicated.
The professionals at Concorde are CPAs, tax professionals, and licensed Investment Securities Representatives specializing in 1031 exchanges. Using our tax background, investment experience and real estate expertise, we work with clients to assure they’re investing in replacement real estate that best suits their needs, and continues the pride and benefits of ownership.concordefinancial.com
Despite my endorsement, you need to find a company which fits with your investing style and personality. I’ve listed some information and ideas to consider when you begin your search for a firm and/or a qualified intermediary.
Before we get too deep into finding a 1031 exchange company, lets start off with what most people need to know the steps for a 1031 exchange.
Here are the 8 steps of a 1031 exchange:
- First, sell your investment property.
- Then, give the capital gains to a qualified intermediary.
- Identify a like-kind property within 45 days of sale.
- Send a duty letter to your qualified intermediary.
- Negotiate with the seller of the property.
- Agree on a sale price.
- Have your intermediary wire the capital gains to the titleholder or title company.
- Lastly, Fill out IRS Form 8824.
You Need a Qualified Intermediary For The Execution of the 1031 Exchange
A 1031 financial transaction starts with the proceeds of the sale of your old property, must go through the hands of what’s termed a qualified intermediary or QI.
The qualified intermediary holds all the profits from the sale and then disburses those monies at the closing of the exchanged property. In order to be qualified, the entire amount of the cash proceeds from the original sale must be reinvested in a new real estate property. Make note that any cash kept by you from the sale of the old property is taxable income and must be reported.
At the close of the relinquished property sale, the proceeds are sent by the title company handling the closing directly to the qualified intermediary. This, company, firm or person holds the funds until the transaction for the replacement property acquisition is ready to close.
Next, the proceeds from the sale of the old property are deposited by the qualified intermediary to purchase the replacement property. After the acquisition of the replacement property closes, the qualified intermediary delivers the property to the taxpayer, all without the taxpayer ever having what the IRS calls constructive receipt of the funds.
What makes the intermediary “qualified?
According to the IRS it’s because they are an independent party with the sole purpose to facilitate the 1031 exchange process. You cannot act as your own facilitator. And your agent which includes your real estate agent, investment broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years, cannot act as your intermediary.
The Properties Must Be Like-Kind to Qualify For 1031.
IRC Section 1031 allows you to postpone paying tax on gains only if you reinvest the proceeds in a similar or like-kind property. Like-kind property is a property of the same nature, character or class. It’s not as complicated as it sounds. Most real estate is like-kind to other real estate. However, there are some exceptions. A common example is real estate property located within the U.S. is not like-kind to property outside of the U.S.
Real property and personal property can qualify as exchange properties under IRS Section 1031. Yet, real property can never be like-kind to personal property.
Here are two important rules as it applies to like-kind properties
- The total purchase price of the replacement like-kind property must be equal to or greater than the total net sales price of the relinquished property.
- All the equity received from the sale of the relinquished property must be used to acquire the replacement, like kind property.
Taxpayers who hold real estate as inventory or who purchase real estate for resale, are considered dealers. These properties are not eligible for Section 1031 treatment. However, if a taxpayer is a dealer and also an investor, they can use Section 1031 on qualified properties. Property for personal use will not qualify for Section 1031.
What To Look For In A 1031 Exchange Qualified Intermediary
When you look for companies to help you with a 1031 exchange, you are usually looking for a Qualified Intermediary.
Closing on a property can be stressful. You many not be thinking about selecting a qualified intermediary, – A.K.A known as an “QI” or an exchange “accommodator” or “facilitator”). The fact is you want to begin your search well before you need one.
The following is a list of ideas which can help you chose a 1031 qualified intermediary which will provide you with questions to consider and ask before selecting one for your 1031 exchange.B
Unlike many financial firms or companies such as stockbrokers or insurance companies, there is no national standard or federal supervision over qualified intermediaries. In Michigan, qualified intermediaries are not required to be licensed, bonded or insured, despite the fact the IRS requires a qualified intermediary to hold your 1031 exchange funds.
Questions to Ask Before Choosing a 1031 Accommodator
How Long Have You Been In Business?
The fact is, the longer the qualified intermediary has been in business, the safer. This is because the qualified intermediary has experience handling exchanges, unique situations and most likely a good understanding of the laws and regulations that govern them.
How will your funds be held?
It’s a good idea to insist your funds be held in a Segregated Qualified Trust Account or a Segregated Qualified Escrow Account. Try to avoid low cost options of a commingled account and QIs that promise to pay a high-interest rate.
Where will are your funds held?
You want your funds safe and secure. 1031 funds kept in a large, reputable FDIC insured bank is the safest option. Don’t forget the FDIC insurance is generally limited to $250,000 per account holder.
Can I have a written copy of your internal controls?
Internal controls are the qualified intermediaries policies and procedures that protect your funds against theft or fraud by the firm’s employees. This is important because it’s your money at risk. The idea is to understand the oversight, and steps required to move or release your money.
The fact is, no single employee should have sole authority. Best practices are to require your signature, followed by multiple written approvals within the qualified intermediaries organization. This makes it difficult for any one or two employees to access your funds inappropriately.
Lastly, the QI should be a complete regular background check on all its employees. A reputable firms takes their fiduciary responsibility seriously and will gladly provide you with a copy of their internal controls.
What types and amounts of insurance does the firm carry?
A qualified intermediaries insurance coverage protects against you and your money from being stolen. Also, if the IRS says you have to pay taxes, as a result of the firm’s negligence you can be covered. At a minimum, your account should be protected by fidelity bond coverage and Errors & Omissions (E&O) insurance.
Please do not consider this article as professional advice. Its use is for general education as part of your due diligence before investing money.