Right now, I’m going to show you the number one mistake people make while doing a 1031 exchange.
Because here’s the problem. You could be doing everything right in your exchange, but if you miss one rule or one timeline, then you may owe a very large amount of taxes.
And real quick, a 1031 exchange is when you sell one rental property and buy another one using IRS rules and timelines. By doing this, you can defer your taxes, sometimes forever, and thus save the money to build generational wealth for your family, just like the big investors do.
Today I’m going to tell you about the number one mistake people 1031 Exchange. But first, we need to have a little bit of history.
Exchanges started in the tax code over 100 years ago, but at that time, people exchanged a property one for another.
For example, I exchanged my 8 acres for your 8 acres, and it was simultaneous, meaning it was exactly the same time. I handed you a deed for my 8 acres, you handed me a deed for your 8 acres. And in fact, this was done up until the 1980s. However, it became impractical to do an exchange simultaneously because I don’t want the property you have or you may not have the property that I want.
So the IRS said, we’re going to call it one transaction. But it really does not have to be at the same time, and it doesn’t have to be with exactly the same property. You could decide on a property later on.
Now, they call it one transaction. But it’s a non simultaneous transaction, meaning it does not have to be at the same time exactly, the same day, the same hour.
In order to make this work, the IRS said, the money will go through the whole transaction. You will sell your property, the funds will go to an entity, someone called a Qualified Intermediary. We’ll explain that in a few minutes. And then the intermediary will buy your new property. Let’s go over this again.
To make it one transaction, you will sell your property, your funds will go directly to a third party, an independent third party, who they’ve named as a Qualified Intermediary, sometimes known as a Q. I. or an Accommodator. And that Qualified Intermediary will then transfer your funds to the property you want to buy.
they designed it so a transaction can be non simultaneous and can even be delayed. Certain rules, timetables, but it can be delayed.
By now you probably figured out what the number one mistake is, and that is not using a qualified intermediary.
So who can be a Qualified Intermediary? Believe it or not, the IRS has no regulated standards that define a Qualified Intermediary.
What the IRS does, it defines disqualified persons. So these are the people you cannot use as your qualified intermediary. Your accountant. your attorney, your banker, your relative, you, your employer or your employee.
Your real estate broker, your escrow officer.
Well, given all the people that you can’t have, who can you have? And how do you choose a Qualified Intermediary?
Here’s some criteria. Deep pockets.
What do deep pockets mean? Usually an institution with access to lots of money. You want a qualified intermediary with experience in 1031 exchanges so they know what to do.
You want them to have bonds and insurance. Remember, they’re going to be holding a lot of your money. And you don’t want them to go off to the Bahamas or to spend it in the cryptocurrency or something else.
And you want them to have good staff and communicate with you. What kind of staff do you want? You want attorneys and accountants, people that really know about 1031 exchanges, and you want to be able to get an answer if you call them up and ask a question.
We want them to handle your money properly so that you qualify for the tax deferral. And we want them to be able to communicate with you, usually by email, but certainly if you pick up the phone and ask a question, you want to be able to get help.
You will have a contract with your Qualified Intermediary, What kind of contract? It will start before you close on the property you’re selling, and it will continue until you’ve closed on the property you’re buying.
In your contract, it will talk about your use of the funds. You can’t use the funds. You can’t borrow against the funds. You can’t get interest from the funds. And you don’t pay taxes on the funds. Who gets the interest? Guess what? The Qualified Intermediary can use that money to pay themselves. That’s why it’s also really important to choose the right one.
And you have specific requirements on how you communicate with your Qualified Intermediary. You must identify the property or properties you’re going to buy to them in writing. So you must communicate with the Qualified Intermediary. And you need to tell them when and what property to buy.
One thing you don’t want to do is make the mistake and not use the proper Qualified Intermediary.
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 because I believe that you deserve the same tax breaks as the big investors. The law says you do. And you do. But don’t take my word for it.
Ask your accountant or ask the IRS. They will tell you the same thing.
So I specialize in helping rental properties like yourself across America to save money on their taxes when they sell one rental property and buy another one. I can help you directly, and I also help you by referring you to an agent in your area that specializes in 1031 exchanges and will help guide you through it.
So, ask your questions in the comments below, or see the description to book a call so I can talk to you about your specific needs. And, I look forward to seeing you in the next video.