Today I’m going to talk about the number one mistake that people make in their 1031 Exchange.
And real quick, a 1031 Exchange is when you sell one rental property, and buy another one using specific I.R.S. rules and timelines.
When you do this, you can defer your taxes, sometimes forever. And thus you can build generational wealth for you and your family, just like the big boys do.
What’s the number one mistake in a 1031 Exchange? It’s related to the Qualified Intermediary, or Q.I. The Qualified Intermediary is probably the one place that you will make a mistake in a 1031 Exchange.
Well, why do you need a Qualified Intermediary? Remember, a 1031 Exchange is when you sell one rental property and then purchase another one under very specific terms and timetables. And the Qualified Intermediary is one of those very specific rules that you need to have a 1031 Exchange. So the number one mistake is not using a Q.I.
Easy, simple, very obvious, but not to everybody. To you, yes, but not to everybody. So the number one mistake in a 1031 Exchange is not using a Q.I. So then what do you do? Number one, you choose the right Q.I. because not choosing the right Q.I. could also become a problem.
What are some of the qualifications on how to choose the right Q.I.? One of them would be, an institution that has deep pockets, that might be a related company to a title company or an insurance company. But the reason you want a company that has deep pockets is because they’re going to be holding a lot of your money. Sometimes hundreds of thousands of dollars, or millions of dollars. So you want a company that’s well backed with bonds and has deep pockets. You also want a Q.I. that will communicate properly with you, with your Closing Officer, and with the owners of the properties that you’re going to buy and the other Closing officers.
You need to have good communication, and of course you need to have a company that’s knowledgeable and experienced.
You want to start your process early.
What do I mean by starting the process early? It means that when you are in the process of selling your rental property, that you immediately start working with a Qualified Intermediary.
They will have separate contracts, they will help guide you. They will work with your Closing Officer and make sure your timetables are correct and that you will have your funds protected properly. Remember, the Qualified Intermediary will be holding your funds. You won’t be taking any funds, you won’t be borrowing against it, you won’t be getting rents against it. You will be essentially giving everything to the Qualified Intermediary. One of the responsibilities that you will have with a Qualified Intermediary is to identify your property that you’re going to buy correctly.
You must identify the properties you want to buy to your Qualified Intermediary in writing, carefully defining the property. In other words, address, legal description, name of the address, and you must identify the property correctly. So that it’s clear to any outside party, meaning would it be an address, would it be a legal description, a location, and you can really usually identify up to three properties. And you must do this within 45 days after Closing your first rental property.
If you miss that deadline, if you do not identify within the 45 days, then you will have a taxable event, and it’ll be the responsibility of the Qualified Intermediary to send your taxes to the I.R.S. and to report the sale.
And finally, you want to close on your identified property or properties. You need to close within 180 days of the Closing date of the rental property that you sold. And it is the obligation for you to follow through on this, but it’s also the obligation of the Qualified Intermediary to send your funds.
To close on that property. You want to do this because if you do not meet the deadline, that 180 days, then you will pay your taxes. The whole idea of doing a 1031 Exchange is to defer your taxes, maybe forever. And so be sure that you follow that Closing timetable and your Qualified Intermediary will help you.
The other reason that you want to do this, make sure that you follow it and monitor it, is that if you do not close, then the Qualified Intermediary will have to report that your Exchange is a sale and you will have to pay your taxes.
Oh, and if we haven’t met, my name is Maxine Golden. I’m a longtime real estate broker and I started the 1031 Exchange Lady Channel for property owners like yourself so that you can get the same tax breaks as the big investors. And the law says you deserve ’em, but don’t take my word for it. Ask your accountant or ask the I.R.S., they will tell you the same thing. Of course, they’ll tell you the same thing. So I specialize in helping property owners like yourself across the cities in America, to find the most experienced real estate brokers who can help them with their 1031 exchanges.
So you can ask me a question in the comments or you can look at the descriptions below. I look forward to seeing you in the next video.