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1031 Tax Exchange Services Explained

A 1031 exchange is a complex transaction which requires working with various 1031 professionals. Although different types of 1031 exchanges (1031 tenants-in-common, 1031-721 REIT, 1031-121, 1031-reverse exchange, etc.) have slightly different processes, the rough process and roles are as follows. If you are looking for a more detailed overview of the process or the different types of transactions, you can find out more at www.nestegginvesting.com or on the IRS's website.

The first step in most 1031 transactions (except a 1031 reverse exchange) is selling your existing property either by yourself or with a real estate broker.

The transaction and escrow will be facilitated by a qualified intermediary, which is analogous to a title company.

Securing a replacement property for a simple 1031 direct exchange is relatively straight forward. By working with a regular commercial broker, one just needs to find a property that fits the 1031 exchange parameters.

If you are pursuing a more complex transaction (1031 tenants-in-common, 1031-721 REIT), the process involves more specialized professionals. Because the replacement properties are actually fractional units that are considered by the SEC as securities and therefore regulated by the SEC, purchase of 1031 tenants-in-common interests require working with a registered representative, broker dealer, and 1031 tenants-in-common sponsor.

A registered representative is analogous to an investment manager. His role is to help an investor to select 1031 replacement properties or fractional units to invest in. A registered representative may also be a real estate broker who helped that investor sell his existing property. From a business standpoint, the registered representative works a sales channel for the 1031 tenants in common sponsor.

The registered representative is allowed to sell these tenants in common interest by working with a broker dealer who is licensed by the SEC. The relationship between the registered representative and the broker dealeris analogous to a real estate agent and a real estate brokerage.

Perhaps the one of the most important constituents for the investor to understand in this process is the 1031 tenants in common sponsor. Read more about evaluating a 1031 TIC Sponsor in our helpful article, 5 Keys to Evaluating a 1031 Exchange Sponsor.

A few to-dos to keep in mind:

  • You need to find a registered representative that you trust to help select a property
  • You need to make sure the sponsor offering the property is reputable and has a long track record.
  • And you may need to talk to specialized lawyers, broker dealers, etc. to consummate the transaction