1031 Exchange Challenges
Hey! I'm new to the 1031 exchange ecosystem and I'm looking to understand the most common pain points in the 1031 exchange process for investors. Due to the 45 day property identification requirement, I am wondering what the main challenges are and whether advisors, DST/TIC strategies, and 1031 facilitator services leave investors satisfied.
If you've been through the 1031 exchange process as an induvial investor, I'd love to hear about your experiences and the challenges that persist.
If you've been through the 1031 exchange as an advisor, what are some of the challenges you still face?
My advice would be to get the replacement property under contract (including inspections and other diligence done) BEFORE the sale closes on the relinquished property. Then, you're not rushing and making bad decisions due to the 45-day clock.
Biggest pain point is the pressure. You're in a weird scenario on the buying side when negotiating with a seller because you have to include in the offer and P&S that the purchase is part of an exchange so they know your clock is ticking. It takes away some of your negotiating power and may make you feel pressured to get a deal done that you shouldn't, just to save the taxes.
Obviously its ideal to have a property in mind or even an accepted offer before the closing date on your relinquished property, but that's easier said than done in many cases.
My biggest challenge by far was my qualified intermediary. They were horrible. Almost missed several deadlines and almost submitted closing disclosures that were done improperly and would have cost me 10's of thousands in taxes because they put everything (assuring meeting deadlines, and calculating all the correct numbers on the disclosures) on me. Find a good intermediary and don't go with one of the massive countrywide companies.
I work with investors through the TIC process. The main challenge for me is when investors come with smaller amounts, say $200k, I need to pool a number of folks together to make the legal costs and admin headaches worthwhile. It's always a bit of a process but I've been able to manage.
Quote from @Brandon Gale:
Biggest pain point is the pressure. You're in a weird scenario on the buying side when negotiating with a seller because you have to include in the offer and P&S that the purchase is part of an exchange so they know your clock is ticking. It takes away some of your negotiating power and may make you feel pressured to get a deal done that you shouldn't, just to save the taxes.
Obviously its ideal to have a property in mind or even an accepted offer before the closing date on your relinquished property, but that's easier said than done in many cases.
My biggest challenge by far was my qualified intermediary. They were horrible. Almost missed several deadlines and almost submitted closing disclosures that were done improperly and would have cost me 10's of thousands in taxes because they put everything (assuring meeting deadlines, and calculating all the correct numbers on the disclosures) on me. Find a good intermediary and don't go with one of the massive countrywide companies.
Brandon, where can I find a good intermediary? What criteria separate a good intermediary from the negative experience you had?
I would also recommend that you have a few backups in case the deal you really want falls through. This could be a DST or TIC into a syndication - but having backups ready to go is always easier than scrambling later.
Quote from @Austin Heath:
Quote from @Brandon Gale:
Biggest pain point is the pressure. You're in a weird scenario on the buying side when negotiating with a seller because you have to include in the offer and P&S that the purchase is part of an exchange so they know your clock is ticking. It takes away some of your negotiating power and may make you feel pressured to get a deal done that you shouldn't, just to save the taxes.
Obviously its ideal to have a property in mind or even an accepted offer before the closing date on your relinquished property, but that's easier said than done in many cases.
My biggest challenge by far was my qualified intermediary. They were horrible. Almost missed several deadlines and almost submitted closing disclosures that were done improperly and would have cost me 10's of thousands in taxes because they put everything (assuring meeting deadlines, and calculating all the correct numbers on the disclosures) on me. Find a good intermediary and don't go with one of the massive countrywide companies.
Brandon, where can I find a good intermediary? What criteria separate a good intermediary from the negative experience you had?
I would look for referrals. Ask your CPA, your lawyer, your agent if any of them have worked with intermediaries in the past. And in my opinion stay away from the massive firms, I went with one of the big ones and it was very clear they had no interest in helping me, just getting everything through quickly and with minimal effort.
With current inventory and interest rate, the biggest challenge for me is to find the right replacement property to meet my goal. It may not be a good idea to purchase something that is not suitable just to save capital gain tax. Please calculate all kinds of what-if scenarios (including taking a hit on capital gain) before proceed.