1031 Exchange - Third Party Companies

[Andrew Wilson]

My brother and I are selling a property that we were gifted from our father.  To avoid capital gains tax, we are planning to invest the proceeds into a new property through a 1031 exchange. I’ve seen different perspectives, but I am wondering if we need to go through a third party company for the escrow account. Costs for this service ranged around $1,000. Do we need to go through a third party company or can we just open a separate account at a bank and have the title company we deal with have them wire the funds directly to the bank?

[Michael Plaks]

Quote from @Andrew Wilson:

My brother and I are selling a property that we were gifted from our father.  To avoid capital gains tax, we are planning to invest the proceeds into a new property through a 1031 exchange. I’ve seen different perspectives, but I am wondering if we need to go through a third party company for the escrow account. Costs for this service ranged around $1,000. Do we need to go through a third party company or can we just open a separate account at a bank and have the title company we deal with have them wire the funds directly to the bank?

If you open an account yourself, you have what is known as "constructive receipt" of the money. Your exchange is dead.

Trying to save the QI (qualified intermediary) fee is very short-sighted. Their job is to keep your exchange valid, and it's more than worth the modest fee. (And no, I do not offer this service, so it is not self-serving.)