Setting up and using a 1031 exchange requires a little bit of homework. There are many companies that offer 1031 exchange services, including Arrow Exchange Services, Inc.
As a 1031 exchange service provider, Arrow is a Qualified Intermediary (QI), which is required in exchange transactions in order to qualify for the favorable capital gains tax treatment. Though QIs tend to perform the same functions and offer the same types of services in terms of the forms of exchange they do and the management of those processes, not all are made the same, so it is worthwhile to talk with a few different QIs before making a final determination.
Setting up and effectively managing a 1031 exchange program can be tricky, and the amount of savings at stake can be significant, so finding the right QI to handle your exchange needs is important. Start by looking for certified facilitators. Certification is offered by an industry association which represents exchange facilitators, and this certification will let you know that the QI you are working with has gone through that education process.
One good place to start is on the Federation of Exchange Accommodators website, where there is more background information on the exchanges and the qualification criteria. The site also features a QI locator, which can help you find the names of QIs in your area who you can then evaluate on your own.
Some basic background on 1031 exchanges
The 1031 exchange is a provision in the tax code that allows property owners to avoid capital gains tax on the proceeds from the sale of that property by exchanging it with property that is of like-kind. There are several different forms of exchange. Exchanges can be done simultaneously, in which case the properties are exchanged at the same time. They can also be set up so that the sale of the existing property precedes the purchase of the new property.
They are used by businesses and individuals alike, but the definition of “like-kind,” varies depending on whether it the property is owned by a company or a person.
Look at the qualifications of the individuals and the stability of the company
When search for a QI company to handle your exchanges, think about whether you need to work with a company that has a national operation or one that is focused locally. Your own situation will be the best determinant of what’s right for you. Also, determine the ratio of lawyers on the staffs of the companies you are evaluating, as this is a good indication of the experience that the company has to offer.
Finally, and importantly, you want to determine how financially stable the company is before you sign on with them. Many exchange services companies are a part of larger insurance and/or title companies. But either way, they will need to validate their financial strength and their ability to cover exposures related to your transactions. Also, understand the details of how the funds are invested. This could be critical to safeguarding the funds that you keep on deposit with these companies.
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