Absolute Beginners Start here

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People who have only heard of 1031 exchanges know this much: it has something to do with real estate. Basically, a 1031 exchange works like this:

  1. first, you call a 1031 'qualified intermediary,' (or 'Q.I.'). They start the exchange process for you.
  2. work with a realtor to sell your old property
  3. at the closing, the money goes straight from the closing to your QI. (I explain why below)
  4. work with a realtor to buy a new property.
  5. when you finally close on your new property, the QI sends your money to the closing.

In this way, you buy and sell real estate without handling any cash. Technically, in the eyes of the law, you're actually TRADING properties with someone. If you possess, hold or control the money at any time between the sale of your old property and the purchase of your new, it becomes taxable to you. That's why when you sell your old property, the money bypasses you and goes straight from the closing to the QI. Later, it will go straight from the QI to the closing of your new property.

Why not just buy and sell outright? 
Because when you sell something, your fingers touch dirty taxable mammon. At least fifteen percent of your hard earned cash goes to the federal government as capital gains tax. And many states pile on their own capital gains tax on top of that! Even if you reinvest the money right away and purchase something else immediately, the IRS will still see that you touched money. And you will be taxed for holding it, even if just for a nanosecond.

Enter the 1031 exchange: this is where the QI comes in who handles this process for you. Using a QI, by the way, is the law; there are no do-it-yourself 1031 exchanges. Your goal is to sell and buy without touching money so you don’t get taxed on it. If you act as your own QI and handle your own money, then you touch it, and therefore pay tax. But let someone ELSE touch the money—the QI—then you don’t pay tax!

...The point is to buy and sell without handling any cash. Technically, TRADING properties....

Isn't that tax evasion? 
Actually, no. IRC §1031 is named after THAT SECTION of the IRS tax code ("IRC §1031" means = "Internal Revenue Code Section 1031"). It’s not illegal because the IRS wrote it! You play by their rules, you pay no tax, and you keep a clean conscience.

Does MY money from the sale of MY property actually go to the QI?
YES! And due-diligence is key here. The QI legally must hold the cash from the sale of your investment real estate. That’s why being careful to choose a reliable QI with a good reputation is essential.

We here at 1031 Exchange Experts are constantly developing ways to keep your money safe and to earn your faith in us. We invented an often-imitated system called 1031Access™ for our clients so they can SEE their money in their password-protected account on the Internet. Remember, the IRS will pour a flamethrower on your exchange if you TOUCH or CONTROL that money in any way. But they didn’t say you couldn’t watch it. The 1031 Exchange Experts invented this system so you can see your money the whole time we are holding it for you.

This is really a very simplified explanation of how a 1031 exchange works. In actuality, it can get a lot more complicated. But here’s the good news: IT IS OUR JOB to make it simple for you, which is just what we do. Give us a call and let us sweat out the hard stuff. Talk to us, tell us your story, and let’s see if there’s a 1031 tax-saving real estate strategy for you! They don’t call us ‘The Experts’ for nothing!

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