1031 Exchange Advisor: Strategy Before Property

An advisor, a qualified intermediary, a CPA and an attorney each hold a different piece of the exchange

The intermediary's role is written into the regulation. Under Reg. section 1.1031(k)-1(g)(4) a qualified intermediary is a person who is not the taxpayer or a disqualified person, who enters into a written exchange agreement with the taxpayer and, under that agreement, acquires the relinquished property from the taxpayer, transfers it to the buyer, acquires the replacement property and transfers it to the taxpayer. The agreement must expressly limit the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the proceeds before the exchange period ends. That is the whole of the job: custody and paperwork. Choosing what to buy is outside it, and intermediaries are not licensed to advise on securities.

The CPA computes the adjusted basis, reconciles the settlement statements, completes Form 8824 and handles the state filings; the attorney deals with the entity that holds title, the assignment of the contract to the intermediary and any partner or trust issue. The advisor's piece is the replacement: which structure fits the equity and the debt, which offerings are open, and how to identify and close them within 45 and 180 days. Who does what, and in which order to engage them, is laid out in coordinating your 1031 advisor team, and how to choose a qualified intermediary covers the custody side.

Strategy comes first because the debt and the income need decide the structure

Two numbers shape every plan. The first is the loan paid off at closing: for exchange purposes it is treated as money you received, so it must be covered by new debt or by cash you add, or the shortfall is taxed. The second is the income you need from the replacement. A seller with no debt who wants monthly income is looking at a different structure from a seller carrying a 60 percent loan who has other income, and the page on replacing the mortgage or adding cash explains the arithmetic.

The structures we work with answer those numbers differently. A traditional DST holds stabilised property with financing, leases and management already in place. A cash out DST is a zero cash flow structure whose non-recourse debt can cover a large debt figure with a small share of the proceeds, leaving the rest for unleveraged offerings. A direct title security gives you a single property through a single-member LLC with fixed rent for the lease term and the decision on when to sell. Every one of them is illiquid, none carries an assured distribution, and each can lose principal if the tenant defaults or the property sells for less than it cost; the proposal states those risks next to the structure it recommends.

The five questions asked on the first call

The first call follows five questions, each tied to a rule. Where are you on the clock, because the identification period begins when the relinquished property transfers and ends at midnight on the 45th day. What debt comes off at closing, because it is treated as money received. Which state is the property in and where do you live, because several states withhold at closing and California keeps a claim on deferred gain through Form FTB 3840 after you buy out of state. How much income do you need, because that rules structures in or out. And who inherits, because deferred gain held until death passes with a stepped-up basis, which changes the advice for an owner who never intends to sell again.

The post on the questions we ask on a first call gives the rule behind each one and a hypothetical worked through all five. Bring the answers and the call is short.

What the proposal contains

A proposal is built from five facts: your closing date or expected closing date, the loan balance that will be paid off, your adjusted basis, the two states, and the income you need. It then answers four questions in order. What is at stake if you do nothing, meaning the realised gain and what deferring it is worth. What has to be replaced, stated as an equity figure and a debt figure because they are solved differently. Which strategies fit, possibly in combination. And which offerings are available now, leaving the specifics to each offering's private placement memorandum.

The first page goes to your CPA with the closing statement and the depreciation schedule; the three things to check are the basis, the debt figure and the state exposure. What a proposal contains and how to read it walks through each section, and the intake page find a DST for your exchange lists exactly what we need from you to build one.

Our eight-step process, from the first conversation to liquidity

The process page sets out eight steps. One: a conversation about your goals, tax exposure and preferences, and whether we are the right fit. Two: direct introductions to the sponsors whose current offerings match your timeline, with access to the managers themselves. Three: reserving equity in one or more offerings and coordinating identification with your intermediary, with reservations that stay flexible if the sale slips. Four: preparing and organising the investment documents, without a bank in the loop. Five: coordinating the transfer of funds from escrow to the intermediary and on to the trust or the LLC, which can often be done in three to five business days.

Six: distributions, where the structure pays them, begin accruing after closing, prorated from your closing date and never assured. Seven: ongoing reviews of the investment and your plan as markets and circumstances change. Eight: help exploring liquidity if you later need capital, including a resale of your interest where one can be arranged, with the caveat that these investments are illiquid and no resale is assured. If you want the exchange side of that timeline as well, working with a qualified intermediary lists the documents and dates.

Who we work with

The firm works with accredited investors selling investment real estate: a single rental, a portfolio, a building held in an LLC or a trust, inherited property, farmland, a practice building, or a partnership where one partner wants out. Each situation bends the rules in its own way, and the who we help hub collects the pages written for each. If your sale is in motion and you are not sure which page applies, where to start routes you by situation, and the DST broker page explains the brokerage half of what we do.

Questions sellers ask about the advisory role