Considerations for No Fee 1031 Exchanges

While the prospect of getting something for nothing is appealing, it isn’t reality in most situations - there is no exception when it comes to Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange s. A Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange by design is a tax deferral strategy, not an investment vehicle. The goal of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange is to achieve tax deferral on qualifying real estate transactions, in turn increasing cash flow and reinvestment potential, which, over time, compounds into greater returns on investments.  

While the traditional Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange Qualified Intermediary model calls for an initial Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange fee, there are good reasons, as we will address in this article.   

Role of a Qualified Intermediary  

The role of a Qualified Intermediary (QI) is to facilitate an exchange by stepping into the shoes of the parties, so the transaction is not merely a sale followed in time with a purchase, but an actual exchange of one property for the other. As such, the main goal of a Qualified Intermediary is to help an (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger achieve tax deferral with a successful exchange by adhering to the rules and regulations set forth in the subject Treasury Regulations. These rules are detailed and complicated to navigate. Therefore, it should be of no importance to the QI how long it takes an (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger to identify and acquired the Replacement Property, so long as it falls within the allowed time frame. However, a Qualified Intermediary with no initial exchange fee is reliant on exchange funds sitting as close to the 180-day exchange period deadline or past, as they only revenue from during the time they hold an (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger ’s exchange funds.  

For a QI to only receive monetary compensation based upon the time they are holding Proceeds received by the taxpayer from the transfer of the relinquished property pursuant to the relinquished property contract. Exchange Funds , poses the question of whether that sole revenue stream is enough to maintain operational controls to protect your investment. And is there the right economic incentive to ensure you receive the ongoing service post exchange if funds were only held for a very short duration.   

The Cost of a 1031 Exchange  

As with most other professional services, there is a fee for services rendered. For a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , the initial fee to start your Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange covers a multitude of aspects including:  

Specialized 1031 Experts  

“You get what you pay for,” is a widely known saying for a reason – it is true. As a QI looking to provide the utmost service to its clients, there is often staff consisting of highly credentialed personnel including specialized 1031 attorneys, CPAs, and Certified Exchange Specialists®. While these persons do not provide legal or tax advice their depth of experience can be invaluable. 

Segregation of Duties 

Reputable QIs are staffed to scale, they have numerous team members that specialize in specific areas of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange to ensure accuracy, prevent mistakes, and maintain accountability. Internal controls are set up to protect the Exchanger’s Personal Identifiable Information (PII), as well as create efficient processes that are not dependent on any one specific team member.  

Industry Leading Technology 

There is software available within the industry including patented Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange workflow technology, Exchange Manager Pro^SM, utilized to date by over 30 national QIs, including the nation’s third largest publicly traded QI. Exchange Manager Pro^SM includes SOC 2 Type II compliance, secure data storage through Microsoft Azure, and automated document creation and deadline notifications reducing potential for human error and helping maintain compliance with IRC §1031. These technologies are costly but provide benefit to the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger and the QI. 

While the prospect of a no cost Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , might be seem appealing at first glance, decades of experience has taught us that when a significant portion of someone’s wealth is at play, they prefer to pay a nominal fee for security and confidence in the QI.  

Security and Liquidity of Exchange Funds 

A secondary role of the QI is to hold exchange funds to avoid actual or constructive receipt by the Exchanger. It is important for the QI to maintain coverages and follows specific guidelines to ensure the safety and security of Proceeds received by the taxpayer from the transfer of the relinquished property pursuant to the relinquished property contract. Exchange Funds . Some of the standard guidelines followed by trustworthy QIs include:  

• Holding funds in segregated banks accounts 
• Maintaining adequate coverages for a fidelity bond, errors & omissions policy, and cyber liability policy   

Some additional measures taken by only the leading QIs, that are of absolutely importance to the integrity of the exchange and safety of the exchange funds include:  

• Utilizing only 4- and 5-star Bauer rated depository banks 
• Segregated accounts opened under the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger ’s SSN or EIN to ensure that should the QI file for bankruptcy it is abundantly clear the funds are not that of the company, but of the individual (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger  
• Exchange funds held in liquid, demand deposit accounts, available for client direction of acquisition for Those certain items of real and/or personal property qualifying as “replacement property” within the meaning of Treasury Regulations Section 1.1031(k)‑1(a) and either: (a) received by the taxpayer within the designation period in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(1) or (b) identified in a written designation notice signed by the taxpayer and hand delivered, mailed, telecopied or otherwise sent to the qualified intermediary before the end of the designation period in accordance with Treasury Regulations Sections 1.1031(k)‑1(b) and (c). The definition of “replacement property” shall not include property the identification of which has been revoked by the taxpayer in accordance with Treasury Regulations Section 1.1031(k)‑1(c)(6); (“New Asset”) Property or properties properly received by a taxpayer as part of a 1031 exchange. Replacement Property at any time  
• Controls against Exchange disbursement directions being submitted fraudulently 
• Dual authorization and verbally confirmed wire instructions 

Following a traditional fee for service model, the QI is motivated only to focus on facilitating a successful tax deferral, with little regard for the duration they are holding your exchange funds. In this model, an (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger can rest assured their exchange funds are being held in their best interest with less of an incentive to reach for revenue by potentially putting (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger funds at risk.   

For over 100 years, since 1921, Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange have been in the US Tax Code with the role of the QI being introduced in the 1991 Regulations. Since that time, the general business model has included an initial fee to start a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange with the ultimate goal of the QI helping achieve tax deferral for the Exchanger.  

Aggregated industry data for 2024 shows that for a standard forward exchange, the exchange fee is nominal, roughly just .05% of the average Relinquished Property Contract Price per exchange. For real estate investors that may have anywhere from 10-50% of their total wealth tied up in real estate investment, that exchange fee is well worth the assurance that their Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange is in capable hands, with measures to protect the overall integrity of the exchange, and their exchange funds.  

Accruit, as a Fiduciary for exchange funds, has an obligation, above all, to maintain the safety and liquidity of funds held for the benefit of an Exchanger. As mentioned above, a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange is a valuable long-term tax deferral vehicle and not an investment vehicle for the funds being held by the QI during the exchange transaction. As such, Accruit encourages all Exchangers to complete their own due diligence, ask questions, and ensure they are comfortable with all of the answers before they engage the services of any QI.  

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified  A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.