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Recent Private Letter Ruling Allows Minimal Qualified Use Period for Distribution from Trust to TIC Owners and Subsequent Sale

05/22/24

The IRS issued a recent Private Letter Ruling on April 19th, 2024 regarding property held within a Testamentary Trust distributed as ...

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The IRS Private Letter Ruling (PLR) 202416012 issued on April 19, 2024, addresses the potential issues in a 1031 Exchange of a trust beneficiary’s Tenancy in Common (TIC) interest in an asset that had formerly been owned by the trust. This PLR involves a testamentary Trust (a trust established by the will of a deceased person) that continued to hold property long after the death of the creator of the Trust to presumably assure the Trust property would devolve to specific beneficiaries. When it became apparent the conditions for termination of the Trust had occurred, the trustees of the Trust petitioned the probate court to approve the sale of the Trust real property.

As part of the termination of the Trust, the Trustees initially considered the sale by the Trust and a 1031 exchange into replacement property. However, certain beneficiaries, including the beneficiary Exchanger requesting the PLR, advised the Trustees and the probate court they wished to effect individual 1031 exchanges of their respective TIC interests in the real property into what would be their individual Replacement Properties. The Trustees and exchanging Beneficiaries, including the Exchanger, agreed as part of the Trust Termination Plan to distribute tenancy in common (TIC) interests in the trust property to separate single member LLCs created by each of the exchanging beneficiaries. Upon approval of the Termination Plan by the Probate Court, each of the LLC’s will complete 1031 exchanges of their TIC interests into Replacement Property.

The IRS ruled that the distribution from the Trust to Exchanger of the TIC interest will not preclude such interest from being deemed “held for investment or for productive use in a trade or business” within the meaning of § 1031(a) of the Code. In issuing the PLR, the IRS distinguished this transaction from similar transactions described in Rev. Rul. 75-292, 1975-2 C.B. 333 and Rev. Rul. 77-337, 1977-2 C.B. 305 where the IRS ruled that distributions of real property out of a business entity with a short-term hold disqualified the real property as being held for investment/business use. The IRS distinguished those scenarios due in large part to the fact that the distributions were voluntary and pre-planned.

The facts provided in this PLR which seem to favor the Exchanger are as follows:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The Trust was a testamentary trust subject to a predetermined termination event beyond the control of the exchanging beneficiaries. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The holding period by the Trust was very lengthy. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The Trust always held the subject property for investment/business use. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The Termination Plan was part of a court-ordered disposition. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The Exchanger/beneficiary is going to acquire and hold qualifying like-kind property and therefore there is a continuity of investment. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"multilevel"}" data-listid="1" role="listitem">
The Exchanger’s LLC is a Single Member LLC and therefore a disregarded entity. 
</li>
</ul>

We’re left with the question of whether this PLR is a harbinger of a softer stance by the IRS in the area of “drop and swap” transactions incident to a 1031 Exchange. Keep in mind that private letter rulings are not the same as a legal precedent and any reliance is only warranted by the Exchanger seeking the ruling and compliance with the facts set forth in the ruling. Though this ruling may not constitute carte blanche approval of “Drops and Swaps”, it may provide comfort for those Exchangers involved in involuntary distributions which otherwise comport with a substantial amount of the facts in this PLR.

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 Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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Recent Private Letter Ruling Allows Minimal Qualified Use Period for Distribution from Trust to TIC Owners and Subsequent Sale

05/22/24

The IRS issued a recent Private Letter Ruling on April 19th, 2024 regarding property held within a Testamentary Trust distributed as ...

1031 Exchange Timeline FAQs

05/14/24

While all rules and regulations set forth in IRC §1031 are equally important due to the fact you are either in ...

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<h2 aria-level="2" paraeid="{57cc8bca-4bfc-4577-bf88-1b84543cbbef}{250}" paraid="281033561" role="heading">What is the 1031 Exchange timeline?  </h2>

The 1031 exchange timeline is just that, the timeline in which a valid 1031 exchange must adhere to. From the closing date of the sale of the Relinquished Property, the clock starts. The 1031 exchange time frame goes by calendar days, not business days and it does not recognize holidays.

<h3 aria-level="3" paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{11}" paraid="2034311790" role="heading">Breakdown of 1031 Timeline </h3>

<h4 paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{17}" paraid="1918193314">45-Day Identification Period</h4>

From the closing date of the sale, the Exchanger has 45-days to identify potential Replacement Property. Before day 46 the potential Replacement Property must be identified meeting the following identification requirements:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Signed and in writing 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Delivered to the QI, Seller, or other party involved in the exchange such as an escrow agent or title company 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Must be unambiguously described using either the street address, a legal description, or distinguishable name such as Denver Coliseum  
</li>
</ul>

The identification of Replacement Property must also follow <a href="https://www.accruit.com/blog/what-are-rules-identification-and-receipt-… of three rules</a>:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
3-Property Rule 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
200% Rule 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
95% Rule 
</li>
</ul>

As a practical matter, the vast majority of most people utilize the 3-property rule which does not require any special considerations.  But once, an exchanger exceeds three properties, he needs to acquire all of them unless the value of all of them is not more than twice the value of the one sold.  Technically not “all” need to be acquired, but the rules refer to at least 95% in value has to be acquired.  Since 95% is basically equivalent to 100%, this rule can seldom be relied upon.

<h4 paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{119}" paraid="1185821713">180-Day Exchange Period</h4>

From the closing date of the sale, the Exchanger has a full 180-day time frame to acquire their identified Replacement Property, but subject to the the Exchanger’s tax return filing due date for the year in which the sale took place. Therefore, in order for an Exchanger to receive their full 180-day exchange period for a 1031 exchange started in the fourth quarter of the year, they would need to file for an extension on their tax return, otherwise their exchange must be completed by their tax return due date, approximately April 15th for individuals.

<h3 aria-level="3" paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{173}" paraid="1920062944" role="heading">Extensions to 1031 Exchange Time Limits </h3>

The only way in which an extension is granted for either the 45-Day or 180-day periods would be one of the following:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="7" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="4" role="listitem">
Federally declared disaster: If the Exchanger lives within an area of a federally declare national disaster. Tax relief of these kinds of issued by the IRS and can be found online.       
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="8" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":767,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Acts of Terrorism: Similar to the above, if the Exchanger resides in an area affected by acts of terrorism, the IRS could declare an extension.   
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="•" data-list-defn-props="{"335552541":1,"335559685":767,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"•","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Military Action: For Exchangers serving in combat zones, they can qualify for tax extensions including 1301 exchange related time limits.  
</li>
</ul>

<h2 aria-level="2" paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{212}" paraid="795841711" role="heading">Frequently Asked Questions on 1031 Exchange Timeline </h2>

Below are some frequently asked questions involving the 1031 exchange timeline, the specific time limits for a 1031 exchange, and the rules of the timeline.

<h4 aria-level="3" paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{228}" paraid="20106886" role="heading">Do I still have to identify Replacement Property if I purchase it before Day 45?  </h4>

If you purchase your Replacement Property before Day 45, you do not have to officially identify it, the purchase counts toward the identification requirements. The purchase however will count toward the 3-property, 200% or 95% rules. If you have left over exchange proceeds you will need to identify additional Replacement Property before Day 46 to avoid a taxable event.

<h4 aria-level="3" paraeid="{9c85d29a-bdcb-4472-a1c5-124ffe6a4c78}{246}" paraid="1546529808" role="heading">Is there any way to get an extension on my 45-Day Identification Period? </h4>

No, there is no way to get an extension for either the 45-Day Identification period or the 180-Day Exchange period, except for a federally declared disaster, acts of terrorism declared by IRS, or Exchanger carrying out military duty in a combat zone.

<h4 aria-level="3" paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{9}" paraid="638424847" role="heading">What happens if I am unable to identify Replacement Property within 45 days?  </h4>

If you are unable to identify Replacement Property within 45 days, your 1031 exchange will be voided, and you will receive your exchange funds back on day 46 which will be subject to payment of applicable taxes.

<h4 aria-level="3" paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{29}" paraid="1859866063" role="heading">I am planning on purchasing two Replacement Properties, how many properties can I identify?  </h4>

The number of properties you can identify depends on which of the three available identification rules you want to follow. If you use the 3-property rule, you can identify a total of three properties, regardless of value. If you use the 200% rule you can identify an infinite number of properties so long as the fair market value total of all properties does not exceed 200% of the relinquished property value. If you exceed the 200% rule, you can use the 95% rule and identify an indefinite number of properties, but you must acquire 95% of the value you have identified which can be very difficult. It is important to note that if you intend on acquiring more than one Replacement Property that you note on your identification the number of properties you intend to acquire to avoid having additional property available and funds in the account when it was never intended to buy that many properties.

<h4 aria-level="3" paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{63}" paraid="631061181" role="heading">What if I identify property within the 45-day window but choose not to proceed with the exchange and just pay the tax? </h4>

Due to a somewhat harsh Private Letter Ruling, it is very difficult to receive and early return on the funds.  In most cases the exchanger has to wait until the exchange period expires.  Once exception is if the choice not to proceed pertains to a written contingency that could not be met and that is beyond the control of the exchanger.  An example would be that a purchase offer was contingent on a zoning variance which the municipality would not grant.

<h4 aria-level="3" paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{97}" paraid="1343217620" role="heading">If I identify in a specific tax year and am not able to receive a return on the funds until the next tax year, what are my reporting obligations? </h4>

For a <a href="/blog/your-1031-exchange-straddling-two-tax-years" title="1031 exchange straddling two tax years">1031 exchange spanning two tax years</a>, the default position is that the capital gain portion of your taxes do not have to be paid until you file the return for the year in which you received the funds, as opposed to the year of the sale.  If a person has losses that they incurred in the year of the sale and wish to offset those, they can make an election to report those in the year of the sale.

<h4 aria-level="3" paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{119}" paraid="969395644" role="heading">Is there a specific form to complete to identify Replacement Property?  </h4>

There is not a specific required document that you must complete, however you must adhere to the identification rules outlined above in order for the identification to be valid. As a convenience, Accruit does provide Exchangers with a Designate Notice for identifying their Replacement Properties.

<h4 paraeid="{85947cfa-8af8-4497-bab9-e983fc708418}{139}" paraid="467748505">What qualifies as the closing or transfer date of the Replacement Property in a 1031 exchange?  </h4>

The specific criteria that must be met to complete a 1031 exchange within the 180-day exchange period, is the “benefits and burdens” of ownership is transferred.

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 Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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1031 Exchange Timeline FAQs

05/14/24

While all rules and regulations set forth in IRC §1031 are equally important due to the fact you are either in ...

What is a Qualified Intermediary?

05/07/24

Looking to do a 1031 Exchange? The word Qualified Intermediary likely came up in your research, but what is a Qualified ...

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<h2 paraeid="{ea696aea-e163-4bc2-bd50-09072ec6e8fb}{223}" paraid="460778413">Qualified Intermediary Explained </h2>

A Qualified Intermediary (QI) is an independent third party that facilitates Internal Revenue Code (IRC) Section 1031 tax-deferred exchanges. Prior to the issuance of the <a href="https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic…; rel="noreferrer noopener" target="_blank">IRS Treasury Regulations</a> in 1991, the buyer was an integral part of the Sellers choice to do an exchange.  The regulations allowed for a Qualified Intermediary to fill that role and be the party with whom the Exchanger is exchanging with. According to the Regulations for an intermediary to be considered “qualified”, it cannot be an agent of the exchanger at the time of the transaction. The Qualified Intermediary must enter into a written agreement for the exchange with the Exchanger, as well as acquire and transfer the Relinquished and Replacement Properties on behalf of the Exchanger, as required by the terms of the exchange agreement.  The acquisition of the sale property, referred to as the Relinquished Property, and the new property being purchased, referred to as the Replacement Property, can be accomplished in a number of ways. However, it is typically satisfied under the rules by the exchanger assigning the rights of the Exchanger under the contracts and providing notice to all parties of such assignment.

<h2 paraeid="{f055dab9-8f9d-48b6-ac08-acbe6e645b67}{143}" paraid="1222374603">Role & Purpose of a Qualified Intermediary: </h2>

The role of the Qualified Intermediary is to act as a middleman in the real estate transaction, handling the acquisition and transfer of property and ensuring that the many specific detailed rules set forth in the regulations are being followed and the integrity of the exchange is intact to achieve tax deferral.

It is also necessary under the rules that the Exchanger avoid actual or constructive receipt of the proceeds of the Relinquished Property sale during the period of time between the sale and the purchase.  The Regulations suggest several ways to ensure the Exchanger is not deemed to have access to those funds, but generally it is satisfied by the Qualified Intermediary holding those funds on behalf of its client, the Exchanger. That is a secondary role it fills.

In short, the purpose of a Qualified Intermediary is to act as a party who the Exchanger can actually exchange with and to keep the transaction in compliance with the many details set forth in the Regulations. Secondarily, it acts as a convenient party to safeguard the exchange funds during the transaction and ensure the Exchanger is not in actual or constructive receipt of them.

<h2 paraeid="{a6bed77c-35ed-4a84-8662-1b4e5842dcd1}{153}" paraid="1670701829">Benefits of a Qualified Intermediary: </h2>

As noted above, the Qualified Intermediary offers many different benefits in the 1031 Exchange process, as it is a nuanced topic that requires deep knowledge. A few advantages to having a QI include their expert knowledge on the rules and regulations of 1031 Exchanges, as well as IRS guidelines, ensuring compliance and reducing the risk of disqualification. They safeguard the funds generated from the sale of the Relinquished Property, holding them in a secure account to prevent direct receipt by the Exchanger. A QI ensures that the Replacement Property is acquired within the strict 180-day timeframe required by the IRS. This time management allows investors to successfully complete the exchange and defer capital gains tax.

<h2 paraeid="{eee39002-a99f-41df-b9bb-8c069220a721}{104}" paraid="2067296102">Choosing a Qualified Intermediary: </h2>

Selecting the right Qualified Intermediary is essential for the success of a 1031 Exchange. It's important to consider several critical factors when making this decision:

Experience: Seek out an established QI with a demonstrated track record and extensive experience in facilitating 1031 Exchanges. A seasoned QI will possess the necessary expertise to guide you through the process and minimize potential risks. Seek QIs with a deep bench of 1031 Exchange experts including staff attorneys, CPAs, as well as Certified Exchange Specialists®.

IRS Compliance: Ensure that the Qualified Intermediary you select strictly adheres to all IRS regulations and guidelines. Request and research references and testimonials to verify their compliance history and credibility.

Security and Protection: Assess the level of security and protection provided by the QI. Verify their use of reputable and highly rated banking institutions to hold the funds. Inquire about the QI's fidelity bond and errors and omissions coverage to protect against unforeseen circumstances.

Customer Service: The chosen Qualified Intermediary should prioritize exceptional customer service. They should be readily available to address your questions and concerns throughout the exchange process.

Professional Affiliations: Look for a QI affiliated with professional organizations such as the Federation of Exchange Accommodators (FEA). Membership in such organizations indicates a commitment to maintaining industry standards and best practices.

When entering a 1031 Exchange, it is crucial to involve a Qualified Intermediary. They facilitate and handle the exchange of funds and property while ensuring regulatory compliance, providing for tax-deferred status. While it is not only paramount to involve a QI in your transaction, choosing the right one is just as important. As a leading Qualified Intermediary, learn more about Accruit’s boutique-style service and factors in our success <a href="https://www.accruit.com/qi-services" rel="noreferrer noopener" target="_blank">here</a>.

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 Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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Title:

What is a Qualified Intermediary?

05/07/24

Looking to do a 1031 Exchange? The word Qualified Intermediary likely came up in your research, but what is a Qualified ...

Accruit Named Finalist in Illinois Real Estate Journals' CRE Awards

04/30/24

Accruit, national leading 1031 Exchange Qualified Intermediary, has been named a finalist, one of three, in the Professional Service Company category ...

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<h2>Accruit has been named a finalist in the Professional Service Company category. </h2>

REjournals has announced the finalists for their 2024 Commercial Real Estate Awards. The REJournals CRE Awards celebrate the achievements, successes and highlights from all sectors of the commercial real estate industry.

Accruit, a national 1031 Exchange Qualified Intermediary and Exchange Accommodate Titleholder, boasts a considerable foothold in the greater Chicago, Illinois market with an office and two staff attorneys located in Chicago, Illinois.

In 2023, Accruit supported over $15+ Billion in real estate transactions through our patented 1031 Exchange software, Exchange Manager Pro℠. Accruit alone as a Qualified Intermediary and Exchange Accommodation Titleholder facilitated $4.12 Billion in real estate transactions.

Specific to Illinois, Accruit facilitated over $218 million in Relinquished Property transactions and over $122 million in Replacement Property transactions, totaling a combined $340+ million of RE closings in Illinois in 2023.

In addition, Accruit presented two real estate continuing education courses for Illinois brokers and agents, as well as two continuing legal education courses to through collaborations with Advocus, formerly ATGF, and Illinois Real Estate Lawyers Association (IRELA). Accruit has participated as panelist speaker for four consecutive years, including 2023, at the RE Journals National Net Lease Summit in Chicago, IL.

Accruit is active in providing 1031 Exchange education and resources to many Illinois associations including NICAR, IRELA, and Advocus.

Lastly, in 2023, Accruit's specialized services, as an Exchange Accommodation Titleholder, was part of the largest sale of a multi-tenant suburban office building in the past 18 months in Illinois, the <a href="https://rejournals.com/oakbrook-terrace-tower-purchased-for-60-million/…; title="Oakbrook Terrace Record Real Estate Transaction">Oakbrook Terrace transaction</a>. Accruit acquired Oakbrook Terrace as part of a Reverse Exchange.

Accruit is honored to be a finalist and looks forward to the awards ceremony June 5th, 2024.

More information about the <a href="https://xqwri.mjt.lu/nl3/-e51r4rViMaDSZA9Bn9WOg?m=AWsAAEENjegAAAAZGRQAA…; title="Illinois RE Journal CRE Awards Finalists">Illinois CRE Awards</a> and full list of finalists.

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Title:

Accruit Named Finalist in Illinois Real Estate Journals' CRE Awards

04/30/24

Accruit, national leading 1031 Exchange Qualified Intermediary, has been named a finalist, one of three, in the Professional Service Company category ...

Do I Need a 1031 Exchange Qualified Intermediary Near Me?

04/23/24

Many Exchangers start their search for a Qualified Intermediary (QI) by searching the internet for “a Qualified Intermediary near me.” ...

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While local QIs offer proximity and knowledge of specific regulations, national QIs like Accruit provide broader expertise, resources, and risk management capabilities. National QIs understand regulations across the country, including state-specific mandates, such as those in Colorado and California.

<h2 paraeid="{5b04b97d-3369-4c3c-9e46-cccd9e85ea5c}{153}" paraid="324070028">Local QI vs. National QI </h2>

Generally, the most important aspect of picking a Qualified Intermediary to help an Exchanger carry out their 1031 Exchange is peace of mind, competency, and dependability. These attributes are not exclusive to local businesses, in fact they might be more commonly found with a national QI.

When considering a QI for a 1031 Exchange, the decision shouldn’t be based on proximity, but rather several other factors that have a greater impact on the exchange, including the following:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Experience & Expertise

<ul>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Local: Knowledgeable of specific local regulations & transactions, smaller volume of cases, limited expertise in complex transactions
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
National: Knowledgeable of wide range of regulations & transactions across different states, larger volume of cases, greater expertise with complex transactions 
</li>
</ul>
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Resources to Scale

<ul>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Local: May be more limited on resources, work on a smaller scale with fewer cases, locally concentrated network
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
National: Typically, robust resources and efficient handling of large volume of cases, wider network of professionals 
</li>
</ul>
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Risk Mitigation

<ul>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
Local: Might not be able to offer the same level of risk mitigation 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="14" role="listitem">
National: Likely to have strong insurance coverage and bonding in place, added safeguards for clients  
</li>
</ul>
</li>
</ul>

While both types of QIs have their benefits, national QIs tend to offer wider expertise, resources, and risk management capabilities. However, the decision ultimately depends on individual needs, transactional complexity, and personal preferences.

<h2 paraeid="{22e154a3-61a9-4b3c-856c-e299813fb97d}{113}" paraid="1957673518">State Regulations for QIs </h2>

When selecting a Qualified Intermediary, there are many options to choose from, some local and some national. While the idea of a local QI may seem attractive, a nationally recognized QI could provide the Exchanger with a better experience and more robust knowledge of the rules & regulations of IRC Section 1031, including the most recent court cases.

It’s important to remember there is no federal regulation of Qualified Intermediaries, however there are some state-level regulations in a handful of states that are meant to protect the Exchanger when facilitating an exchange with Relinquished Property within that state. We will focus on Colorado, Accruit’s headquarters, and California, a state with some of the most extensive requirements for Qualified Intermediaries.

<h3 paraeid="{22e154a3-61a9-4b3c-856c-e299813fb97d}{237}" paraid="318966997">Colorado </h3>

Requirements for Qualified Intermediaries conducting 1031 Exchanges vary from state-to-state. In 2009, Colorado’s legislature passed <a href="https://leg.colorado.gov/sites/default/files/images/olls/2009a_sl_116.p…; rel="noreferrer noopener" target="_blank">HB09-1252</a>. This legislation includes the following requirements:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
QIs must maintain a minimum $1 million fidelity bond, and a $250,000 E&O policy.  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
QIs must deposit exchange funds into an escrow account in which both QI and Exchanger need to authorize withdrawals. If the account holds more than $250,000, the client must provide written authorization for a withdrawal.  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
QIs must notify clients within two days of any changes in asset ownership, as well as always acting as a client fiduciary for the 1031 Exchange funds.  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
QIs are prohibited from storing client exchange funds in the same account as operating funds, as well as lending exchange funds to anyone other than the Exchange Accommodator Titleholder.  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="3" role="listitem">
Seller must set aside money for taxes on the property. To satisfy this requirement, investors executing a 1031 Exchange must sign an “affirmation of reasonably estimated tax to be due”. This is to notify the state that the investor won’t owe taxes, since they will be deferred using a 1031 Exchange.  
</li>
</ul>

<h3 paraeid="{a88319e4-4409-40de-a94f-a750f507e79d}{134}" paraid="2121492888">California </h3>

California imposes similar requirements for QIs as Colorado, in <a href="http://www.leginfo.ca.gov/pub/07-08/bill/sen/sb_1001-1050/sb_1007_bill_…; rel="noreferrer noopener" target="_blank">Senate Bill 1007, Chapter 708</a>  which include:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Identical fidelity bond and Errors & Omissions (E&O) policy. 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
QIs must act as custodians and maintain strict management of client funds. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
The California Franchise Tax Board mandates QIs to withhold 31/3% of the sales price for the Exchanger if the exchange fails. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
For 1031 Exchanges involving out-of-state property, California enforces a "claw back" <a href="http://leginfo.ca.gov/pub/13-14/bill/asm/ab_0051-0100/ab_92_bill_201306…; rel="noreferrer noopener" target="_blank">policy</a>:

<ul>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Investors/property owners cannot evade state taxes by exchanging California property for out-of-state property. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="1" role="listitem">
Profits from the replacement property sale are taxed both in the selling state and California. 
</li>
</ul>
</li>
</ul>

<h3 aria-level="3" paraeid="{a88319e4-4409-40de-a94f-a750f507e79d}{244}" paraid="1486450575" role="heading">Other State Regulations </h3>

In addition to Colorado and California, other states with Regulations on Qualified Intermediaries include:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
Idaho 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
Maine 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
Nevada 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="7" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
Virginia 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="8" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="2" role="listitem">
Washington 
</li>
</ul>

With help from the Federation of Exchange Accommodators (FEA), several states including Colorado are instituting further requirements, leading by example in assuming higher industry standards for Qualified Intermediaries.

Requirements include:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="9" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="15" role="listitem">
Qualified escrow and/or trust accounts for client funds. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="10" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="15" role="listitem">
Minimum bond and insurance requirements 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="15" role="listitem">
Fund withdrawal authorization requirements. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="15" role="listitem">
Registration requirements for QIs. 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="15" role="listitem">
Investment limitations on exchange proceeds. 
</li>
</ul>

To conclude, as an Exchanger, you do not necessarily need to have a Qualified Intermediary near you, since IRC Section 1031 is in the federal tax code, a local presence doesn’t necessarily provide any additional benefit. While an Exchanger might not be able to walk into an Accruit office, Accruit’s effortless and consistent accessibility makes direct communication simple via live chat, phone calls, virtual meetings, and email communication directly with the parties handling your exchange.

<h2 paraeid="{3ebf5be3-67f7-49b3-b2c5-fb231de69f25}{161}" paraid="1406959131">The Accruit Difference </h2>

Accruit is a national leading 1031 Exchange Qualified Intermediary headquartered in Denver, CO with satellite offices across the country including Chicago, IL, Dillon & Bozeman, MT, Miami, FL, Philadelphia, PA, Detroit, MI, and Phoenix, AZ, to name a few. In these cities, Accruit is not only a leading national QI, but also a reliable, local option for those wanting to stick with a QI closer to home.

While there is an abundance of Qualified Intermediaries available, they do not all offer the same level of service as a national QI, like Accruit. Accruit takes pride in offering boutique-style services across a diverse range of exchanges from simple to the most complex.

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="4" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="12" role="listitem">
Accruit sets itself apart from other QIs in a variety of ways, including: $50 million Fidelity Bond, $25 million E&O, and $15 million Cyber Liability.  
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="5" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="12" role="listitem">
Robust team of 1031 Exchange experts, including five staff attorneys, CPAs, and multiple Certified Exchange Specialists® (CES). 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="6" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="12" role="listitem">
The developer of the patented 1031 Exchange workflow technology that allows for a seamless and efficient exchange process in turn allowing our team to provide a better customer experience and more meaningful dialogue with Exchangers since the mundane data collection is electronic and automated through embedded controls. 
</li>
</ul>

Accruit is specialized to accommodate all shapes and sizes of 1031 Exchanges, regardless of a variety of complex factors including:

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="7" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Institutional Investors with High-Volume Exchanges 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="8" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Exchanging involving Multiple Buyers and Sellers, including LLCs, Corporations, and Partnerships 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="9" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Fractional Interests (Delaware Statutory Trusts (DSTs) and Tenants in Common (TICs)) 
</li>
</ul>

<ul role="list">
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="1" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Seller-financed Transactions 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="2" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Multiple Relinquished and Replacement Properties 
</li>
<li aria-setsize="-1" data-aria-level="1" data-aria-posinset="3" data-font="Symbol" data-leveltext="" data-list-defn-props="{"335552541":1,"335559685":720,"335559991":360,"469769226":"Symbol","469769242":[8226],"469777803":"left","469777804":"","469777815":"hybridMultilevel"}" data-listid="17" role="listitem">
Exchanges That Occur in Multiple States 
</li>
</ul>

Accruit’s patented 1031 Exchange technology, Exchange Manager ProSM, sets us apart from other QI companies. Standardizing workflow with automated deadline reminders and document creation increases efficiency, decreasing error potential throughout the 1031 Exchange process. This software coupled with our Qualified Professionals, including five staff attorneys, Certified Public Accountants (CPAs), and multiple Certified Exchange Specialists® (CES), makes for diligent, streamlined exchanges.

For an Exchanger, a national Qualified Intermediary with a comprehensive array of services and expertise, like Accruit, makes navigating the complexities of 1031 Exchanges become not just manageable but effortless. Whether you're engaging in forward exchanges, reverse exchanges, or complex transactions involving multiple parties and properties across various states, Accruit’s expert team and advanced technology ensure a seamless experience. At Accruit, we don't merely facilitate 1031 transactions; we enhance them, providing unmatched, meaningful service and expertise at every turn.

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 Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Metatags:

Title:

Do I Need a 1031 Exchange Qualified Intermediary Near Me?

04/23/24

Many Exchangers start their search for a Qualified Intermediary (QI) by searching the internet for “a Qualified Intermediary near me.” ...

The Rise of Build-to-Rent Homes: A Lucrative Investment and Housing Solution

04/22/24

In this article, we'll discuss what build-to-rent homes are, why investors are increasingly drawn to this sector, and why more ...

Body:

In recent years, the real estate landscape has witnessed a notable shift in housing preferences and investment strategies. One trend that has gained significant traction is the concept of build-to-rent homes. This model involves the construction of residential properties specifically intended for rental purposes, rather than for sale to individual homeowners.

<h2 aria-level="2" paraeid="{b780e81c-871a-4a57-a7fe-95ddf1fc36f8}{6}" paraid="450254952" role="heading">What is a Build-to-Rent Home?  </h2>

Build-to-rent homes, often abbreviated as BTR, are purpose-built residential properties designed and constructed with the intention of being rented out to tenants rather than sold as individual units. Unlike traditional rental properties, which may consist of converted apartments or single-family homes once owned by a homeowner, build-to-rent developments are planned from the ground up to cater to the needs and preferences of today’s renters.

These properties typically offer a range of amenities and communal facilities, such as fitness centers, swimming pools, coworking spaces, and communal gardens, aimed at enhancing the living experience for tenants. Additionally, build-to-rent communities often feature professional property management services to ensure tenants' needs are promptly addressed and the properties are well-maintained.

<h2 aria-level="2" paraeid="{b780e81c-871a-4a57-a7fe-95ddf1fc36f8}{42}" paraid="942849641" role="heading">Why Investors are Flocking to Build-to-Rent Homes </h2>

For decades the approach for investors in the Single-Family Rental space was to purchase existing homes at a low price, make minimal improvements before renting the home out for a handful of years, after which time the home is ultimately sold. Today’s real estate market is proving that strategy to be very difficult, if not impossible. Due to a national housing shortage and high interest rates, the option for investors to buy existing single-family homes for a profitable investment are scarce. Therefore, many Single-Family Rental (SFR) investors are turning their sights and finite resources to Build-to-Rent homes.

The growing popularity of build-to-rent homes among investors can be attributed to several key factors:

Stability and Predictable Income Streams: Build-to-rent properties offer investors a reliable and steady stream of rental income, providing greater stability compared to other forms of real estate investment, such as flipping or speculative development. With long-term leases and a built-in demand for rental housing, investors can enjoy consistent cash flows and mitigate the risks associated with vacancy and market fluctuations.

According to a report by Real Capital Analytics, investment in build-to-rent properties surged to a record high of $7.4 billion in the first half of 2023, representing a 43% increase compared to the same period the previous year.

Favorable Market Dynamics: Changing demographics, evolving lifestyle preferences, and affordability constraints have fueled the demand for rental housing across various demographic segments, including millennials, young professionals, and empty nesters. Millennials are reaching a stage in life where they want a single-family home, but due to a lack of savings, high home prices and high interest rates, the desire for homeownership isn’t a reality – so they are turning to single-family rentals. As a result, build-to-rent developments are well-positioned to capitalize on this growing demand and achieve high occupancy rates.

Data from the U.S. Census Bureau reveals that the homeownership rate in the United States declined to 64.5% in 2023, down from a peak of 69.2% in 2004, indicating a shift towards rental living.

Scalability and Portfolio Diversification: Build-to-rent investments offer investors the opportunity to scale their portfolios efficiently by acquiring multiple properties within a single development or across different locations. The many aspects of property management are made easier if the properties are in proximity to others being rented out.  By diversifying their holdings across various markets, investors can spread risk and optimize their returns, particularly in markets with strong rental demand and favorable economic fundamentals.

A study conducted by the Urban Land Institute (ULI) found that 72% of institutional investors surveyed viewed build-to-rent as a core or strategic part of their real estate portfolios, highlighting the sector's appeal for institutional capital deployment.

<h2 aria-level="2" paraeid="{b780e81c-871a-4a57-a7fe-95ddf1fc36f8}{146}" paraid="1039953100" role="heading">Why Individuals are Embracing Build-to-Rent Living </h2>

The appeal of build-to-rent homes extends beyond investors to tenants seeking flexible and hassle-free housing solutions. Several factors contribute to the growing interest in build-to-rent living among individuals:

Flexibility and Lifestyle Benefits: Build-to-rent communities offer tenants greater flexibility and freedom compared to traditional homeownership. With shorter lease terms and the option to renew or relocate easily, renters can adapt to changing life circumstances without being tied down by mortgage obligations or property maintenance responsibilities. Tenants interested in getting a feel for a particular community before putting down roots through a purchase of a home can accomplish this without the significant commitment.  Others may not be able to afford a home in a certain area but feel the quality of the local school district is worth living in the particular BTR community.

Research conducted by the National Multifamily Housing Council (NMHC) found that 79% of renters considered flexibility and the ability to relocate for job opportunities as important factors influencing their housing decisions.

Access to High-Quality Amenities and Services: Build-to-rent developments prioritize the provision of premium amenities and services aimed at enhancing the quality of life for residents. From state-of-the-art fitness centers and resort-style pools to pet-friendly facilities and on-site concierge services, tenants can enjoy a resort-like living experience without the burden of homeownership.

A survey conducted by Multifamily Executive magazine revealed that 67% of renters were willing to pay higher rents for access to desirable amenities and conveniences within build-to-rent communities.

Affordability and Cost-Efficiency: In many markets, renting a build-to-rent home can offer cost advantages compared to purchasing a comparable property. With rising home prices and tightening mortgage lending standards, many individuals, particularly younger generations, find homeownership financially out of reach. Renting allows them to enjoy the benefits of homeownership, such as modern amenities and community living, at a fraction of the cost.

Data from the Joint Center for Housing Studies of Harvard University indicates that the median renter household spent 20.7% of their income on housing in 2023, compared to 33.1% for homeowner households, highlighting the affordability advantage of renting for many households.

<h2 aria-level="2" paraeid="{b780e81c-871a-4a57-a7fe-95ddf1fc36f8}{230}" paraid="1924705196" role="heading">Can Investors utilize a 1031 Exchange on Build-to-Rent Properties? </h2>

This large strategy shift in Single Family Rental sector, brings up an interesting question – Are BTR homes eligible for a 1031 Exchange? The answer is dependent on the fact pattern of each specific situation, but there are some general considerations.

<h3 aria-level="3" paraeid="{1a039454-ed8c-4a5c-81cf-261a03e108ca}{1}" paraid="80540192" role="heading">BTR Property as Relinquished Property  </h3>

Under Section 1031, an Exchanger must have acquired the subject property with the intent to use as an investment or for use in a business or trade.  It seems clear that Build-to-Rent properties as Relinquished Property are assets used in connection with the BTR company’s primary business, so this important threshold is met.

<h3 aria-level="3" paraeid="{1a039454-ed8c-4a5c-81cf-261a03e108ca}{41}" paraid="1675646061" role="heading">BTR Property as Replacement Property  </h3>

In general, an investor can utilize a <a href="/resources/understanding-build-suit-and-improvement-exchanges" title="Build-to-Suit Exchange Procedural Outline">Build-to-Suit</a> (BTS) 1031 Exchange to dispose of existing real estate properties and acquire new land and construct their Replacement Property, in this case Build-to-Rent properties, upon the land with their Exchange Funds.  However, this cannot be done in a straightforward manner, rather the transaction must be facilitated using a third-party accommodator.

The issue presented when an Exchange wants to use the value of improvements to property as part of the Replacement Property value, is that without anything more, using proceeds to pay for labor and material is not equivalent to using funds to acquire like-kind property.  Due to this distinction, in in the year 2000, the IRS came out with Rev. Proc. 2000-37 to provide a “safe harbor” structure to accomplish the end goal of allowing the improvement value to be counted as part of the overall 1031 Exchange.

In a nutshell, the Exchanger retains the services of a an “Exchange Accommodation Titleholder” or (“EAT”), which is typically also a Qualified Intermediary, who takes title to the Replacement Property(ies), in a BTS exchange it is the raw land.  The EAT will acquire the property via a new LLC under which it is the single member.  While in title, the desired improvements are made as directed and supervised by the Exchanger.  Once the improvements are done, or earlier depending upon applicable exchange rule deadlines, ownership of the property is handed over to the Exchanger directly.  With this legal sleight of hand, the Exchanger is deemed to have acquired real estate as improved rather than simply real estate plus the value of labor and materials, the latter of which would not otherwise be eligible for a 1031 Exchange.

<h3 aria-level="3" paraeid="{1a039454-ed8c-4a5c-81cf-261a03e108ca}{77}" paraid="1731951562" role="heading">BTR Property as Replacement Property with Land Owned by Related Entity </h3>

In situations where the Exchanger is acquiring the new land from a third party, the transaction can take place as described above.  However, at times the target land is held by a party deemed “related” to the taxpayer entity, i.e. held by an affiliate.  In this case, it makes the structure of a BTS Exchange property somewhat more complicated.

Under certain IRS Related Party rules, an Exchanger cannot acquire land that is owned by the Related Party.  So, without more, should the EAT in the process described above acquire the property from an Exchanger Related Party and then transfer it to the Exchanger, it would not pass muster.  However, there are a series of IRS Private Letter Rulings that provide a possible way around the Related Party impediment.

This technique entails having the EAT lease the property from the Related Party under a long-term lease.  The EAT then makes the improvements, in this case builds the homes, and as a legal matter, the improvements are owned by the EAT as lessee and not part of the underlying (fee) land ownership.  The homes are ultimately transferred to the Exchanger as Replacement Property via an assignment of the membership interest in the lease.  The acquisition does not run afoul of the Related Party rules since the property improvements are received entirely from the EAT and in no respect from the Related Party.

<h3 aria-level="3" paraeid="{1a039454-ed8c-4a5c-81cf-261a03e108ca}{241}" paraid="784361771" role="heading">BTR Property as Replacement Property with Land Owned by the Taxpayer </h3>

In the event the target land is owned directly by the Exchanger, the structuring is even made more difficult since a Related Party does not exist with which to enter into the lease arrangement to separate the parties.  In this instance, it might be possible to change the ownership of the Replacement Property from the Exchanger to a Related Party to the Exchanger.  Once that is done, then the <a href="/resources/leasehold-improvement-exchange-process" title="Leasehold Improvement Exchange Flyer to 1031 Exchange into Improvements on Related Party Property">Leasehold Improvement Exchange</a> as described above can be structured.

It is important to note that the IRS does not allow the Related Party issue to be skirted as easily as simply changing the ownership to that of an affiliate.  Pursuant to IRS Rev. Proc. 2004-51, in order to recognize such a change of ownership, a period of more than 180 days must elapse before the Exchanger is not deemed to own the Replacement Property.  Any such change to the ownership of the Replacement Property, at the minimum, would require a passage of 180 days before an improvement process could be put into place.  It would be helpful as well for there to be independent business reasons supporting the change in ownership.

In conclusion, Build-to-rent homes represent a compelling investment opportunity for real estate investors seeking stable income streams, portfolio diversification, and exposure to the growing demand for rental housing. Similarly, individuals are increasingly turning to build-to-rent living as a flexible, convenient, and cost-effective housing solution that aligns with their lifestyle preferences and financial realities.

For real estate investors looking to enter the BTR sector, 1031 Exchanges, specifically Build-to-Suit possibly utilizing leasehold improvement structures, can be utilized to defer capital gains, depreciation recapture, state, and net investment income tax. Depending on the owner of the land in which the properties will be constructed, additional planning and due diligence may be required in order to be in accordance with 1031 Exchange rules and regulations.

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 Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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The Rise of Build-to-Rent Homes: A Lucrative Investment and Housing Solution

04/22/24

In this article, we'll discuss what build-to-rent homes are, why investors are increasingly drawn to this sector, and why more ...

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