1031 Exchange Accommodators: What They Are And What They Do

Complex strategies are often involved when attempting to make a breakthrough in commercial real estate investment, and one such strategy that has garnered attention is the 1031 exchange.

A 1031 exchange is a tax-deferral strategy for real estate investors, allowing them to relinquish property and reinvest the proceeds into a like-kind property, postponing capital gains tax liabilities.

If you’re researching this tax-deferment technique, it’s important to understand the role of a 1031 exchange accommodator, the unsung heroes of 1031 exchanges. 

In this blog, we’ll shed light on who these professionals are and what they do, helping you gain insights into how they can protect your relinquished and investment properties during the exchange process. 

What Is A 1031 Exchange Accommodator?

1031 Exchange accommodators, frequently known as intermediaries or facilitators, play a key role in 1031 exchanges within commercial real estate. 

Acting as third-party experts, their primary function is to transform a conventional sale and purchase into a more intricate exchange, facilitating the tax-deferral process for an investor.

They ensure that the stringent Internal Revenue Service (IRS) regulations are met, maintaining the capital gains tax benefits. In return for their expertise, 1031 exchange accommodators are typically compensated through a fee structure, making their involvement a crucial component of successful 1031 exchange transactions.

What Does A 1031 Exchange Accommodator Do?

1031 exchange accommodators actively participate in transactions, aiding clients in achieving their investment objectives. They’re distinct from a client’s real estate agent, serving the specific purpose of structuring and facilitating the exchange process. 

This exchange facilitator earns fees for their services, simplifying the intricate transaction, and although the industry lacks federal regulation, they operate under the oversight of organizations such as the Federation of Exchange Accommodators. 

In modern 1031 exchanges, selling one property to purchase another is the norm, adhering to strict timelines and Internal Revenue Code regulations. The process, refined over the years with updates in 1991, is more accessible for the average investor.

Additionally, accommodators contribute to long-term financial planning, comprehending an investor’s current situation and assisting them in achieving future financial goals. Their expertise greatly influences and streamlines the 1031 exchange process, making them a valuable asset for investors.

Why Should I Use A 1031 Exchange Accommodator?

Engaging a 1031 exchange accommodator is highly advantageous for potential commercial real estate investors contemplating a 1031 exchange. 

These experts bring valuable expertise in navigating the intricate and technical rules governing such exchanges. Moreover, many states require them to be licensed and bonded, providing added security for investors. 

Clients can also review their current bond and insurance for peace of mind.

Ultimately, using a 1031 exchange accommodator is a common, reliable, and time-tested method for achieving a 1031 exchange, offering a straightforward and trusted approach compared to alternative means like a swap or Starker exchange.

How Do I Choose A 1031 Exchange Accommodator? 

Several factors can guide you toward making an informed choice when selecting from many potential 1031 exchange accommodators for your investment needs. 

Start by verifying membership in the Federation of Exchange Accommodators (FEA), which often indicates a reputable and ethical professional.

Ensuring they have a fidelity bond and Errors and Omissions (E&O) insurance is crucial for financial security. Consider the company’s size, as larger firms may provide added fund security options like qualified escrow accounts. 

Assess your needs; facilitators actively seek solutions, while accommodators focus on paperwork. Additionally, expertise varies, so choose based on your specific requirements: paperwork proficiency or practical application insights.

What’s The Difference Between A 1031 Exchange Accommodator And A Qualified Intermediary?

In the context of 1031 exchanges, the terms “Exchange Accommodator” and “Qualified Intermediary” (QI) are often used interchangeably. Still, they have specific differences and benefits relative to certain requirements and situations.

1031Exchange Qualified Intermediaries are specialized facilitators for tax-deferred exchanges, adhering to Treasury Regulations. Often referred to as “accommodators” or “exchange facilitators,” QIs handle the essential mechanics of a 1031 exchange.

Engaging a QI allows the taxpayer to avoid being considered in receipt of funds by the IRS. The QI takes possession of the sale proceeds, keeping them until they’re used to acquire the replacement property, thus ensuring IRS compliance.

Without a QI and a proper 1031 exchange agreement, the IRS may not recognize the transaction as a 1031 exchange, rendering it ineligible for tax deferment. This specialized role provides a strong advantage in maintaining the integrity of the 1031 exchange process and preserving its tax benefits.