Anyone that can explain how a 1031 exchange works very simply?

Question

I'm looking to sell one of my rentals because it is free and clear and even though it is a great property in a great neighborhood, I think I could do better on the cash flow. These are my questions and I appreciate any and all feedback..this is not something in my comfort zone, but always learning.

1. I was quouted a fee of $1000 by an online company I called.

2. Since the premise of a 1031 exchange is that the 3rd party holds the funds from the sale of property "A",  how do I find a company I can trust with my hard earned money.

3. Can one add funds from what property "A" sold for to buy "property B"...

4. Can the funds added be from someone other than me, the original owner of property "A".

Thanks for any and all input. This is not an area I am familiar with so give me grace if my questions sound off..

Christine Mwai · Answer

Thanks to each of you and for the great feedback above! I appreciate it tremendously.

Dave Foster · Answer

Thanks @Natalie Kolodij #whosblushingnow.  Here's a few bullet point answers to your questions @Christine Mwai

• 750 - 1000 is pretty standard.  A small firm that does fewer and has less economy of scale will usually be more expensive.  A company providing a minimal level of personal service might be cheaper.
• You find your company the same way you find any other trusted vendor.  Experience, expertise, reputation.  One thing beyond the normal assurances that is a "must have" as far as I'm concerned is that your QI should have segregated dual signatory FDIC insured accounts.  Segregated means that your exchange funds are never co-mingled with any other exchange for the purpose of a QI making interest on your account.  Dual signatory means that every account requires two signatures - yours and the QI's before money can transfer.That protects you from money disappearing and as importantly rises to level of control that falls short of the IRS being able to say you have constructive receipt and voiding your exchange.  And FDIC speaks to itself.  No one has ever lost money in a bank that went under that was FDIC chartered.
• You can add funds to buy a bigger property.  You can split the funds to buy two or more properties with mortgages.  All that is key is that in order to defer all tax you must purchase at least as much as you sell and use all the proceeds from your sale in the purchase or purchases.
• Someone else may add funds - either through a loan to you, a gift to you, or buy buying a % interest in the new property.  If the property you sold was $200K you must buy at least $200K of real estate to defer all tax.  But you could by 50% of a $400K property as tenants in common with another friend or investor.

Tim Puffer · Answer

@Natalie Kolodij - She speaks sound words - you definitely want to be able to vet companies working with them online.

Natalie Kolodij · Answer

@Dave Foster should be able to clarify- he's also an amazing 1031 intermediary to work with, and has a stand out reputation.

I'd be a little leery of a company online if I didn't have some type of experience with them, but that's just me.

Kenneth Reimer · Answer

@Christine Mwai Christine, these are great questions that I'm sure many people have.

1. I'm not as versed on the price as compared to the process, but $1000 seems reasonable for an exchange intermediary.

2. I believe track record, and reaching out to people that have executed a 1031 exchange will be key. If you do decide to proceed, I would lay out your goals, needs, and preferences. This way, you'll be able to key in the type of intermediary you would like.

3. Yes, you can add funds. The important part of a 1031 is that you exchange into a property of equal or greater value. By moving all of the money, you don't have any "boot" (which is money you didn't move, and therefore pay capital gains on). One of the constraints related to adding funds, is in regards to your identification period. Within the 45 days of closing your property, you can identify a total of 3 properties, with a maximum aggregate value of 200% of your downleg (the property you are selling).

4. I'm not sure on pooling money in a partnership with partially deferred equity. To my knowledge, you are able to do that. However, I would hate to lead you in the wrong direction, and this is a question for the intermediary.

This is a great website with a plethora of information if you'd like to get more in depth.

http://www.1031exchange.com/faq/

I hope this helps Christine, and please reach out with any other questions!

Kenny Reimer

Jessica Zolotorofe · Answer

@Christine Mwai, I wrote a blog post about this if it helps at all. Happy to answer any other questions! Here it is: Guide to the 1031 Exchange

Anyone that can explain how a 1031 exchange works very simply?

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