Does a 1031 exchange company give tax advice, or do I need my own CPA?

The regulation separates the roles on purpose, and the separation is two years deep

The intermediary safe harbor only works because the intermediary is treated as a stranger to you. Reg. §1.1031(k)-1(g)(4)(i) says it is not considered your agent, which is what keeps its possession of the proceeds from being treated as your receipt.

Paragraph (k)(2) then draws the line around the people who are close to you. A person who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two-year period ending on the date of the transfer of the first relinquished property is treated as your agent and is disqualified.

Two kinds of prior work are ignored for this test: services on exchanges intended to qualify under §1031, and routine financial, title insurance, escrow or trust services by a financial institution, title insurance company or escrow company. IRS Fact Sheet FS-2008-18 puts it more bluntly still: you can not act as your own facilitator.

Five things the exchange company actually delivers, and none is an opinion

The engagement is documentary and custodial. Read the exchange agreement and you will find obligations to paper the transaction and to hold money, not to advise.

• The exchange agreement containing the (g)(6) limits on your rights to the funds, explained in Can I touch or borrow against my exchange funds?
• The assignment of your sale contract and the written notice to all parties on or before the transfer, required by §1.1031(k)-1(g)(4)(v)
• An account that holds the net proceeds, with the safeguards the Federation of Exchange Accommodators tells exchangers to ask about
• Receipt and date-stamping of your written identification, which must reach a person involved in the exchange rather than your own adviser
• Funding of the replacement closing and a closing file you can hand to your accountant

The decisions that only your accountant can make, because they land on your return

Whether to exchange at all is an arithmetic question about your basis, and the intermediary has never seen your depreciation schedules. IRS Fact Sheet FS-2008-18 states that it is critical that you and your tax representative adjust and track basis correctly, and that deferred gain is tax-deferred, not tax-free.

Form 8824 is filed by you with your return for the year of the exchange, so its preparation, and the Form 4797 and Schedule D entries for any boot, sit with your preparer. So do the estimated payments if part of the deal is taxable.

The modelling that decides the structure is accounting work too: adjusted basis, unrecaptured section 1250 gain, the 3.8% net investment income tax, state tax and withholding. Start with How do I calculate the adjusted basis of my rental? and Sell and pay the tax vs do a 1031.

Where an attorney is the only right answer

Anything touching who owns the property is legal work with a tax consequence. The taxpayer that sells has to be the taxpayer that buys, which makes vesting, entity conversions and trust titling a drafting problem before it is a filing problem; Same-taxpayer rules in 1031 exchanges sets out the boundaries.

Partnerships and families need counsel earlier still. Restructuring before a sale, related-party timing and the two-year rule under §1031(f) all turn on documents signed months before the closing, as Drop-and-swap and swap-and-drop and Who counts as a related party? explain.

An intermediary will prepare its own forms and will not redraft your deed, your operating agreement or your trust.

Why nobody names a specific replacement property unless they are licensed to sell it

The common frustration is that the accountant, the attorney and the intermediary all decline to say what to buy. That is not evasiveness; recommending a security is regulated activity, and a beneficial interest in a Delaware Statutory Trust is sold as one.

Is a DST a security, and who is allowed to sell me one? covers who may make the recommendation and on what basis. Breakwater Exchange is a 1031 exchange broker working inside a regulated broker-dealer framework, licensed in all 50 states, with vetted national DST sponsors.

Direct property is different again: a real estate agent can show you buildings but cannot tell you whether the purchase satisfies §1031. Choosing a 1031 exchange advisor sets out how the roles fit together.

Eight questions that sort a facilitator from an advisor

Ask each of these of each person on the team, and note who answers 'that is not our role'. That answer is often the correct one, and it tells you which seat is still empty.

• Who will tell me, in writing, what my taxable gain would be if I simply sold?
• Who calculates my basis in the replacement property afterwards, and who tracks it?
• Who prepares Form 8824, and is that price included in my usual return fee?
• Who confirms that my vesting on the sale matches the vesting on the purchase?
• Does anyone here receive compensation from a sponsor or a product, and how much?
• Are you registered, licensed or certified, and by whom? The FEA runs the Certified Exchange Specialist programme for exchange facilitators.
• What errors and omissions cover or bond do you carry, and in what amount?
• Will you put your answer in an email I can give to my CPA?

The language to be suspicious of

The IRS gives one usable test for a bad adviser. Its 'beware of schemes' warning says taxpayers should be wary of individuals promoting improper use of like-kind exchanges, that such promoters typically are not tax professionals, and that many of them refer to these as 'tax-free' rather than 'tax-deferred' exchanges.

The fact sheet lists the pitches that follow: exchanging non-qualifying vacation or second homes, and claiming an exchange after taking possession of the cash proceeds. Both are covered on What disqualifies a 1031 exchange?.

Nothing here is advice about your own facts; confirm the rules and the numbers with your CPA or attorney before you sign an exchange agreement.