Brokers says he cannot arrange a direct 1031 exchange?

Question

We've been talking to some brokers about a 1031 exhange. They explained to us that it is almost impossible to arrange a direct property to property exchange, that we would have to sell and buy within the allotted time period only.
Also they said it is practically impossible to arrange a contingency sale. Needless to say I was greatly disappointed.
Is it true that 99% of 1031 exchanges are done indirectly, not through a direct exchange one property for another? That seems like a risky way to do things.

Account Closed · Answer

If I've got a house and you've got a house and we swap, that's a direct exchange and not a 1031.  Used to be a direct exchange wasn't taxed. That law might still be on the books. You need to consult a good real estate tax lawyer.

(My 1031 facilitator tells me I don't need her for a direct swap.)

Bill Exeter · Answer

I wanted to clarify one comment made by Dave T.

He is absolutely correct that direct deeding has been around for 20 years (actually since 1990 when Rev. Rul. 90-34 was issued by the IRS).

However, the Purcahse and Sale Agreement (Contract) for both the relinquished property and the replacement property must be assigned to the Qualified Intermediary.

Technically, which means contractually (on paper), the Qualified Intermediary must acquire the relinquished property from the taxpayer and then sell to the buyer, and then acquire the replacement property from the seller and transfer to the taxpayer in order to have a successful and valid 1031 Exchange.

The Qualified Intermediary also should provide the closing agent with instructions as required under Rev. Rul. 90-34 to deed the property directly to the actual recipient rather than thru the Qualified Intermediary.

So, the Qualified Intermediary will never take title to either property unless a Reverse 1031 Exchange or an Improvement 1031 Exchange is being used, but the Qualified Intermediary must be contractually assigned into both transations.

Lynn Z · Answer

You can identify several properties you intend to replace your relinquished property with.

Several investors I know ran out of time identifying these prospective properties because their relinquished property sold faster than they expected.

I think the 180 days is sufficient to complete everything.  Always has been for me. Don't forget your money is tied up after closing the first property until you close the replacement property.  I don't really like to have significant funds not drawing interest in the hands of anyone even my best friend.

Lawyers hate the paperwork for a 1031 exchange but they must be on board before the contract is let for the relinquished property so language is inserted notifyin g the buyer that there is a 1031 exchange involved.  The HUD is made out in the QI's name and that could freak someone out.

Bill Exeter · Answer

Actually, what you describe is a direct swap or two party exchange, but it is a 1031 Exchange.  The only difference is that you can do it without a professional Qualified Intermediary.  It would still be reported on IRS Form 8824 as a 1031 Exchange.

Mark Hu · Answer

I plan to be conservative, having only a small amount of experience in buying and selling. However I do appreciate the comments.

Bill Exeter · Answer

Hi Mark,

Yes, it is true that most 1031 exchanges are completed on a delayed basis.  There are very few "two party swaps."  They can be done, but it is difficult.  Buyers and sellers are usually not willing to accept those type of contingencies.

You might want to consider a reverse 1031 exchange where you can buy your property first and then you have 180 days to sell your existing property.  It takes a lot of the risk out of the transaction because you have already bought your property.  They are much more complicated and expensive, but can reduce the risk due to the time constraints.  Here is a brief article regarding reverse 1031 exchanges: http://www.exeter1031.com/article_why_use_reverse_1031_exchange.aspx