Category: 1031 Exchange General

What is a Land Trust? 
The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking. 
Land Trust Origins 
The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership. 
Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England. 
The Evolution of Land Trusts in U.S. Law 
Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following: 

The Trustee had duty to take action upon direction from the beneficiary 
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder 
The trust term was limited to 20 years 
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies) 

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust: 

Illinois 
Indiana 
Florida 
Hawaii 
Virginia 
South Dakota 

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges 
Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.   
Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest. 
Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:  
“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”. 
This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust. 
Considerations for Land Trusts in 1031 Exchanges 
The presence of a land trust holding title to a property that is being sold as Relinquished Property   in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.   
Some of the variations in the preparation and signature on a PSA involving land trust property are: 

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee 
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such 
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity 
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust) 

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic. 
When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”.  Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party. 
 
In summary, in some states, land trusts are a common way for title to real estate to be held.  Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.    
 
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.    
   

What is a Land Trust? 
The term “Land Trust” is generally used in several different contexts, including in connection with open land conservation. However, this blog pertains to the type of land trust that is often used by people, or other legal entities, to separate the title to real estate from the beneficial ownership of the property. This separation is created by the property being deeded at the time of acquisition, or sometime thereafter, by placing title in the name of the Trustee and creating a trust instrument, a Land Trust Agreement, naming the trust beneficial owner, otherwise known as the Beneficiary. In most cases, the Trustee is a corporate trustee who is in the business of acting in this capacity and receives an annual fee for its services. In some cases, an individual is named as the Trustee. The land trust is disregarded for tax purposes, and the beneficiary of the trust receives the economic benefits and burdens of the ownership. The land trust provides certain liability protection, confidentiality of actual ownership, succession of ownership, as well as certain other benefits that users are sometimes seeking. 
Land Trust Origins 
The origins of land trusts date back to medieval times when all real estate was owned by the King but granted to noblemen who fought on behalf of the King. But when the nobleman died fighting in wars in his service to the King, the land reverted back to the King, who could dole it out to a new loyalist. Creative thinking at the time, lawyers (likely) came up with this idea of taking the land handed out and putting title under the name of a Trustee for the benefit of the nobleman. Therefore, the nobleman’s death in support of the King would not cause the property to revert since the title would not be affected by the death. The land would remain in the trust for the benefit of the named successor beneficiary(ies). Separating title from the use and benefit of the property also solved another problem in those times. When a property owner holding title did not wish the property to transfer to his first-born son up his death, which was the law at the time, the land trust allowed the initial beneficiary to name others in the family to succeed him in beneficial ownership. 
Eventually the State (the King) realized that this legal arrangement limited its important control over property ownership. In 1535, a new law was passed known as the “Statute of Uses”. Essentially, it provided that regardless of how title was held, whomever had the “use and benefit” of the property ownership was deemed the legal owner. The law applied only to passive trusts where the actual duties of the Trustee were negligible or non-existent, versus an active trust where the Trustee had true duties, decision making, etc. The passive trust was no longer legally recognized, and the Statute of Uses became part of the Common Law in England. 
The Evolution of Land Trusts in U.S. Law 
Fast forwarding to the early days of the United States, as a core body of law to follow, most states adopted the Common Law of England. In the late 1800s and again in the 1920’s, the Illinois Supreme Court reviewed a couple of trust arrangements that would in time become land trusts as we known them today. Essentially, the trust agreement before the court provided that the Trustee held legal title to the property and would take direction from the beneficiary. For all intents and purposes, the Trustee had no independence nor active responsibility. The court examined the land trust document and found the following: 

The Trustee had duty to take action upon direction from the beneficiary 
The Trustee had duty to apprise the Beneficiary of anything it received as record titleholder 
The trust term was limited to 20 years 
If the trust was still in place after 20 years, the Trustee had to hold a public sale of the property and distribute the proceeds to the Beneficiary(ies) 

Review of the facts and circumstances might lead to the conclusion that this was a passive trust, and therefore not valid. However, the Illinois Supreme Court found that these very limited duties were still enough to cause the trust to be active and, as such, valid. Over the years, many other state courts had occasion to rule on the same type of trust arrangement and for the most part found them to be passive and violated the Statute of Uses. As a result, the land trust flourished particularly in Illinois. Today, some states allow them due to case law and some under statutory authority. Below is a list of states that recognize the conventional land trust: 

Illinois 
Indiana 
Florida 
Hawaii 
Virginia 
South Dakota 

Impact of 2017 Tax Law on Land Trusts and Like-Kind Exchanges 
Prior to 2018, a like-kind exchange could take place not only for real estate, but also such things as personal property and intangibles. This included a broad range of assets, personal property included such things as machinery, equipment, aircraft and railcars, whereas examples of intangibles include fast food and hotel franchise rights and territorial product distribution rights.   
Among other things that were not permitted historically under the Code for exchange treatment included interests held under certificates of trust or beneficial interest. A holder of an interest in a land trust is considered to hold the beneficial interest and that interest in considered personal property. After signing into law, The Tax Cuts and Jobs Act (TCJA) effective January 1, 2018, Section 1031 was changed to simply allow real estate exchanges and nothing more. So, while holding a beneficial interest was never allowed, after the start of 2018, neither was a personal property interest. 
Holding interest in real estate in land trusts have always been very common. As mentioned above, among many other benefits, they are used as a form of asset protection, similar to the use of a limited liability company. At one time, there was concern by people and their advisors that an exchange might not qualify due to the fact that the Exchanger’s interest was defined as holding the beneficial interest in the trust. This led to a considerable number of people to request some clarity on the part of the IRS. This resulted in the issuance of Rev. Rul. 92-105 which stated that:  
“A taxpayer’s beneficiary interest in an Illinois land trust constitutes real property which may be exchanged for other real property without recognition of gain or loss under IRC §1031 provided that the requirements of that section are otherwise satisfied”. 
This removed any uncertainty about the qualification under §1031 for an Exchanger selling property that was held under a land trust. In addition, by deeming it “real estate,” in 2018, when “personal property” was dropped from the type of assets capable of being exchanged, this had no effect on selling out of a land trust. 
Considerations for Land Trusts in 1031 Exchanges 
The presence of a land trust holding title to a property that is being sold as Relinquished Property   in the first leg of an exchange can require extra care when administering an exchange. Technically, since the title to the property and the deed to the Buyer is in the name of the Trustee, the Trustee should also be the signer of the PSA, but this is not always the way PSAs are completed and signed in practice.   
Some of the variations in the preparation and signature on a PSA involving land trust property are: 

The PSA will reference the land trust as Seller, and it will be signed by the Land Trustee 
The PSA will reference the land trust as Seller, but it will be signed by the Beneficiary with an express reference to the Beneficiary signing in his capacity as such 
The PSA will reference the land trust as Seller and the Beneficiary will just sign on the signature line in his own name with no further reference to his capacity 
The PSA will simply show the Beneficiary as the Seller and will be signed as such (with no reference to the land trust) 

The manner of execution can pose legal risks, specifically, risks as to the contract enforceability, but that is another topic. 
When using the Qualified Intermediary safe harbor under the exchange Regulations, it is required that “…the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment…”.  Due to the many ways a PSA may describe the Seller and how it might be signed, the Assignment of Contract Rights and Notice need to correspond to the named party(ies) even if the title to the property is held by a land trust. When in doubt, the other selling party can be added to the documents, as it would be better to have an extra party than to leave out a necessary party. 
 
In summary, in some states, land trusts are a common way for title to real estate to be held.  Due to the origin of the land trust concept and the interpretation of various state courts they are not available in every state. Some documents effecting the real estate, like a mortgage/deed of trust, as a legal matter have to be signed by the legal titleholder (i.e. the land trust). Other documents such as contracts and leases are sometimes signed by the land trust Beneficiary directly. Ideally the document references their capacity as Beneficiary. In any event, the exchange Regulations require adherence to form which requires exchange documents to reflect parties to the PSA, notwithstanding how legal title is held.    
 
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.    
   

While the prospect of getting something for nothing is appealing, it isn’t reality in most situations – there is no exception when it comes to 1031 Exchanges. A 1031 Exchange by design is a tax deferral strategy, not an investment vehicle. The goal of a 1031 Exchange is to achieve tax deferral on qualifying real estate transactions, in turn increasing cash flow and reinvestment potential, which, over time, compounds into greater returns on investments.  
While the traditional 1031 Exchange Qualified Intermediary model calls for an initial 1031 Exchange fee, there are good reasons, as we will address in this article.   
Role of a Qualified Intermediary  
The role of a Qualified Intermediary (QI) is to facilitate an exchange by stepping into the shoes of the parties, so the transaction is not merely a sale followed in time with a purchase, but an actual exchange of one property for the other. As such, the main goal of a Qualified Intermediary is to help an Exchanger achieve tax deferral with a successful exchange by adhering to the rules and regulations set forth in the subject https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… Regulations. These rules are detailed and complicated to navigate. Therefore, it should be of no importance to the QI how long it takes an Exchanger to identify and acquired the Replacement Property, so long as it falls within the allowed time frame. However, a Qualified Intermediary with no initial exchange fee is reliant on exchange funds sitting as close to the 180-day exchange period deadline or past, as they only revenue from during the time they hold an Exchanger’s exchange funds.  
For a QI to only receive monetary compensation based upon the time they are holding Exchange Funds, poses the question of whether that sole revenue stream is enough to maintain operational controls to protect your investment. And is there the right economic incentive to ensure you receive the ongoing service post exchange if funds were only held for a very short duration.   
The Cost of a 1031 Exchange  
As with most other professional services, there is a fee for services rendered. For a 1031 Exchange, the initial fee to start your 1031 Exchange covers a multitude of aspects including:  
Specialized 1031 Experts  
“You get what you pay for,” is a widely known saying for a reason – it is true. As a QI looking to provide the utmost service to its clients, there is often staff consisting of highly credentialed personnel including specialized 1031 attorneys, CPAs, and Certified Exchange Specialists®. While these persons do not provide legal or tax advice their depth of experience can be invaluable. 
Segregation of Duties 
Reputable QIs are staffed to scale, they have numerous team members that specialize in specific areas of a 1031 Exchange to ensure accuracy, prevent mistakes, and maintain accountability. Internal controls are set up to protect the Exchanger’s Personal Identifiable Information (PII), as well as create efficient processes that are not dependent on any one specific team member.  
Industry Leading Technology 
There is software available within the industry including patented 1031 Exchange workflow technology, Exchange Manager ProSM, utilized to date by over 30 national QIs, including the nation’s third largest publicly traded QI. Exchange Manager ProSM includes SOC 2 Type II compliance, secure data storage through Microsoft Azure, and automated document creation and deadline notifications reducing potential for human error and helping maintain compliance with IRC §1031. These technologies are costly but provide benefit to the Exchanger and the QI. 
While the prospect of a no cost 1031 Exchange, might be seem appealing at first glance, decades of experience has taught us that when a significant portion of someone’s wealth is at play, they prefer to pay a nominal fee for security and confidence in the QI.  
Security and Liquidity of Exchange Funds 
A secondary role of the QI is to hold exchange funds to avoid actual or constructive receipt by the Exchanger. It is important for the QI to maintain coverages and follows specific guidelines to ensure the safety and security of Exchange Funds. Some of the standard guidelines followed by trustworthy QIs include:  

Holding funds in segregated banks accounts 
Maintaining adequate coverages for a fidelity bond, errors & omissions policy, and cyber liability policy   

Some additional measures taken by only the leading QIs, that are of absolutely importance to the integrity of the exchange and safety of the exchange funds include:  

Utilizing only 4- and 5-star Bauer rated depository banks 
Segregated accounts opened under the Exchanger’s SSN or EIN to ensure that should the QI file for bankruptcy it is abundantly clear the funds are not that of the company, but of the individual Exchanger  
Exchange funds held in liquid, demand deposit accounts, available for client direction of acquisition for Replacement Property at any time  
Controls against Exchange disbursement directions being submitted fraudulently 
Dual authorization and verbally confirmed wire instructions 

Following a traditional fee for service model, the QI is motivated only to focus on facilitating a successful tax deferral, with little regard for the duration they are holding your exchange funds. In this model, an Exchanger can rest assured their exchange funds are being held in their best interest with less of an incentive to reach for revenue by potentially putting Exchanger funds at risk.   
 
For over 100 years, since 1921, 1031 Exchange have been in the US Tax Code with the role of the QI being introduced in the 1991 Regulations. Since that time, the general business model has included an initial fee to start a 1031 Exchange with the ultimate goal of the QI helping achieve tax deferral for the Exchanger.  
Aggregated industry data for 2024 shows that for a standard forward exchange, the exchange fee is nominal, roughly just .05% of the average Relinquished Property Contract Price per exchange. For real estate investors that may have anywhere from 10-50% of their total wealth tied up in real estate investment, that exchange fee is well worth the assurance that their 1031 Exchange is in capable hands, with measures to protect the overall integrity of the exchange, and their exchange funds.  
Accruit, as a Fiduciary for exchange funds, has an obligation, above all, to maintain the safety and liquidity of funds held for the benefit of an Exchanger. As mentioned above, a 1031 Exchange is a valuable long-term tax deferral vehicle and not an investment vehicle for the funds being held by the QI during the exchange transaction. As such, Accruit encourages all Exchangers to complete their own due diligence, ask questions, and ensure they are comfortable with all of the answers before they engage the services of any QI.  
 
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.      
 

While the prospect of getting something for nothing is appealing, it isn’t reality in most situations – there is no exception when it comes to 1031 Exchanges. A 1031 Exchange by design is a tax deferral strategy, not an investment vehicle. The goal of a 1031 Exchange is to achieve tax deferral on qualifying real estate transactions, in turn increasing cash flow and reinvestment potential, which, over time, compounds into greater returns on investments.  
While the traditional 1031 Exchange Qualified Intermediary model calls for an initial 1031 Exchange fee, there are good reasons, as we will address in this article.   
Role of a Qualified Intermediary  
The role of a Qualified Intermediary (QI) is to facilitate an exchange by stepping into the shoes of the parties, so the transaction is not merely a sale followed in time with a purchase, but an actual exchange of one property for the other. As such, the main goal of a Qualified Intermediary is to help an Exchanger achieve tax deferral with a successful exchange by adhering to the rules and regulations set forth in the subject https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… Regulations. These rules are detailed and complicated to navigate. Therefore, it should be of no importance to the QI how long it takes an Exchanger to identify and acquired the Replacement Property, so long as it falls within the allowed time frame. However, a Qualified Intermediary with no initial exchange fee is reliant on exchange funds sitting as close to the 180-day exchange period deadline or past, as they only revenue from during the time they hold an Exchanger’s exchange funds.  
For a QI to only receive monetary compensation based upon the time they are holding Exchange Funds, poses the question of whether that sole revenue stream is enough to maintain operational controls to protect your investment. And is there the right economic incentive to ensure you receive the ongoing service post exchange if funds were only held for a very short duration.   
The Cost of a 1031 Exchange  
As with most other professional services, there is a fee for services rendered. For a 1031 Exchange, the initial fee to start your 1031 Exchange covers a multitude of aspects including:  
Specialized 1031 Experts  
“You get what you pay for,” is a widely known saying for a reason – it is true. As a QI looking to provide the utmost service to its clients, there is often staff consisting of highly credentialed personnel including specialized 1031 attorneys, CPAs, and Certified Exchange Specialists®. While these persons do not provide legal or tax advice their depth of experience can be invaluable. 
Segregation of Duties 
Reputable QIs are staffed to scale, they have numerous team members that specialize in specific areas of a 1031 Exchange to ensure accuracy, prevent mistakes, and maintain accountability. Internal controls are set up to protect the Exchanger’s Personal Identifiable Information (PII), as well as create efficient processes that are not dependent on any one specific team member.  
Industry Leading Technology 
There is software available within the industry including patented 1031 Exchange workflow technology, Exchange Manager ProSM, utilized to date by over 30 national QIs, including the nation’s third largest publicly traded QI. Exchange Manager ProSM includes SOC 2 Type II compliance, secure data storage through Microsoft Azure, and automated document creation and deadline notifications reducing potential for human error and helping maintain compliance with IRC §1031. These technologies are costly but provide benefit to the Exchanger and the QI. 
While the prospect of a no cost 1031 Exchange, might be seem appealing at first glance, decades of experience has taught us that when a significant portion of someone’s wealth is at play, they prefer to pay a nominal fee for security and confidence in the QI.  
Security and Liquidity of Exchange Funds 
A secondary role of the QI is to hold exchange funds to avoid actual or constructive receipt by the Exchanger. It is important for the QI to maintain coverages and follows specific guidelines to ensure the safety and security of Exchange Funds. Some of the standard guidelines followed by trustworthy QIs include:  

Holding funds in segregated banks accounts 
Maintaining adequate coverages for a fidelity bond, errors & omissions policy, and cyber liability policy   

Some additional measures taken by only the leading QIs, that are of absolutely importance to the integrity of the exchange and safety of the exchange funds include:  

Utilizing only 4- and 5-star Bauer rated depository banks 
Segregated accounts opened under the Exchanger’s SSN or EIN to ensure that should the QI file for bankruptcy it is abundantly clear the funds are not that of the company, but of the individual Exchanger  
Exchange funds held in liquid, demand deposit accounts, available for client direction of acquisition for Replacement Property at any time  
Controls against Exchange disbursement directions being submitted fraudulently 
Dual authorization and verbally confirmed wire instructions 

Following a traditional fee for service model, the QI is motivated only to focus on facilitating a successful tax deferral, with little regard for the duration they are holding your exchange funds. In this model, an Exchanger can rest assured their exchange funds are being held in their best interest with less of an incentive to reach for revenue by potentially putting Exchanger funds at risk.   
 
For over 100 years, since 1921, 1031 Exchange have been in the US Tax Code with the role of the QI being introduced in the 1991 Regulations. Since that time, the general business model has included an initial fee to start a 1031 Exchange with the ultimate goal of the QI helping achieve tax deferral for the Exchanger.  
Aggregated industry data for 2024 shows that for a standard forward exchange, the exchange fee is nominal, roughly just .05% of the average Relinquished Property Contract Price per exchange. For real estate investors that may have anywhere from 10-50% of their total wealth tied up in real estate investment, that exchange fee is well worth the assurance that their 1031 Exchange is in capable hands, with measures to protect the overall integrity of the exchange, and their exchange funds.  
Accruit, as a Fiduciary for exchange funds, has an obligation, above all, to maintain the safety and liquidity of funds held for the benefit of an Exchanger. As mentioned above, a 1031 Exchange is a valuable long-term tax deferral vehicle and not an investment vehicle for the funds being held by the QI during the exchange transaction. As such, Accruit encourages all Exchangers to complete their own due diligence, ask questions, and ensure they are comfortable with all of the answers before they engage the services of any QI.  
 
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.      
 

While the prospect of getting something for nothing is appealing, it isn’t reality in most situations – there is no exception when it comes to 1031 Exchanges. A 1031 Exchange by design is a tax deferral strategy, not an investment vehicle. The goal of a 1031 Exchange is to achieve tax deferral on qualifying real estate transactions, in turn increasing cash flow and reinvestment potential, which, over time, compounds into greater returns on investments.  
While the traditional 1031 Exchange Qualified Intermediary model calls for an initial 1031 Exchange fee, there are good reasons, as we will address in this article.   
Role of a Qualified Intermediary  
The role of a Qualified Intermediary (QI) is to facilitate an exchange by stepping into the shoes of the parties, so the transaction is not merely a sale followed in time with a purchase, but an actual exchange of one property for the other. As such, the main goal of a Qualified Intermediary is to help an Exchanger achieve tax deferral with a successful exchange by adhering to the rules and regulations set forth in the subject https://www.accruit.com/sites/default/files/Internal%20Revenue%20Servic… Regulations. These rules are detailed and complicated to navigate. Therefore, it should be of no importance to the QI how long it takes an Exchanger to identify and acquired the Replacement Property, so long as it falls within the allowed time frame. However, a Qualified Intermediary with no initial exchange fee is reliant on exchange funds sitting as close to the 180-day exchange period deadline or past, as they only revenue from during the time they hold an Exchanger’s exchange funds.  
For a QI to only receive monetary compensation based upon the time they are holding Exchange Funds, poses the question of whether that sole revenue stream is enough to maintain operational controls to protect your investment. And is there the right economic incentive to ensure you receive the ongoing service post exchange if funds were only held for a very short duration.   
The Cost of a 1031 Exchange  
As with most other professional services, there is a fee for services rendered. For a 1031 Exchange, the initial fee to start your 1031 Exchange covers a multitude of aspects including:  
Specialized 1031 Experts  
“You get what you pay for,” is a widely known saying for a reason – it is true. As a QI looking to provide the utmost service to its clients, there is often staff consisting of highly credentialed personnel including specialized 1031 attorneys, CPAs, and Certified Exchange Specialists®. While these persons do not provide legal or tax advice their depth of experience can be invaluable. 
Segregation of Duties 
Reputable QIs are staffed to scale, they have numerous team members that specialize in specific areas of a 1031 Exchange to ensure accuracy, prevent mistakes, and maintain accountability. Internal controls are set up to protect the Exchanger’s Personal Identifiable Information (PII), as well as create efficient processes that are not dependent on any one specific team member.  
Industry Leading Technology 
There is software available within the industry including patented 1031 Exchange workflow technology, Exchange Manager ProSM, utilized to date by over 30 national QIs, including the nation’s third largest publicly traded QI. Exchange Manager ProSM includes SOC 2 Type II compliance, secure data storage through Microsoft Azure, and automated document creation and deadline notifications reducing potential for human error and helping maintain compliance with IRC §1031. These technologies are costly but provide benefit to the Exchanger and the QI. 
While the prospect of a no cost 1031 Exchange, might be seem appealing at first glance, decades of experience has taught us that when a significant portion of someone’s wealth is at play, they prefer to pay a nominal fee for security and confidence in the QI.  
Security and Liquidity of Exchange Funds 
A secondary role of the QI is to hold exchange funds to avoid actual or constructive receipt by the Exchanger. It is important for the QI to maintain coverages and follows specific guidelines to ensure the safety and security of Exchange Funds. Some of the standard guidelines followed by trustworthy QIs include:  

Holding funds in segregated banks accounts 
Maintaining adequate coverages for a fidelity bond, errors & omissions policy, and cyber liability policy   

Some additional measures taken by only the leading QIs, that are of absolutely importance to the integrity of the exchange and safety of the exchange funds include:  

Utilizing only 4- and 5-star Bauer rated depository banks 
Segregated accounts opened under the Exchanger’s SSN or EIN to ensure that should the QI file for bankruptcy it is abundantly clear the funds are not that of the company, but of the individual Exchanger  
Exchange funds held in liquid, demand deposit accounts, available for client direction of acquisition for Replacement Property at any time  
Controls against Exchange disbursement directions being submitted fraudulently 
Dual authorization and verbally confirmed wire instructions 

Following a traditional fee for service model, the QI is motivated only to focus on facilitating a successful tax deferral, with little regard for the duration they are holding your exchange funds. In this model, an Exchanger can rest assured their exchange funds are being held in their best interest with less of an incentive to reach for revenue by potentially putting Exchanger funds at risk.   
 
For over 100 years, since 1921, 1031 Exchange have been in the US Tax Code with the role of the QI being introduced in the 1991 Regulations. Since that time, the general business model has included an initial fee to start a 1031 Exchange with the ultimate goal of the QI helping achieve tax deferral for the Exchanger.  
Aggregated industry data for 2024 shows that for a standard forward exchange, the exchange fee is nominal, roughly just .05% of the average Relinquished Property Contract Price per exchange. For real estate investors that may have anywhere from 10-50% of their total wealth tied up in real estate investment, that exchange fee is well worth the assurance that their 1031 Exchange is in capable hands, with measures to protect the overall integrity of the exchange, and their exchange funds.  
Accruit, as a Fiduciary for exchange funds, has an obligation, above all, to maintain the safety and liquidity of funds held for the benefit of an Exchanger. As mentioned above, a 1031 Exchange is a valuable long-term tax deferral vehicle and not an investment vehicle for the funds being held by the QI during the exchange transaction. As such, Accruit encourages all Exchangers to complete their own due diligence, ask questions, and ensure they are comfortable with all of the answers before they engage the services of any QI.  
 
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.      
 

Selling foreign real estate and reinvesting in other foreign real estate through a 1031 Exchange presents unique challenges beyond those of a 1031 Exchange with domestic property. While tax deferral benefits can still apply, factors such as differing tax codes and fluctuations in currency and markets require careful planning. In this blog, we explore important considerations for Exchangers contemplating a 1031 Exchange involving foreign property.  
Foreign Property Is Not Like-Kind to U.S. Property 
In a 1031 Exchange, both Relinquished and Replacement Properties must be like-kind, meaning real estate held for business or investment can be exchanged for another, regardless of type (ex. a multi-family property for an office building). For U.S. exchanges, properties must be within the continental U.S. Puerto Rico is excluded, but the U.S. Virgin Islands may qualify. In the context of 1031, https://www.accruit.com/blog/1031-exchanges-involving-foreign-property”… properties can only be exchanged for other foreign properties, regardless of location. Domestic and foreign properties cannot be exchanged with each other. 
Tax Treatment in Foreign Jurisdictions 
When conducting a 1031 Exchange with foreign property, it’s crucial to understand how the tax laws of the foreign country may impact the transaction. While the U.S. allows tax deferral under IRC §1031, most other countries do not recognize this provision, potentially resulting in immediate tax liabilities. In some cases, foreign countries impose higher capital gains tax rates than the U.S. (as high as 50%), reducing the benefits of deferral. 
Another consideration is how foreign taxes interact with U.S. tax rules. If you pay capital gains tax in another country, you might be able to claim a foreign tax credit (FTC) or a deduction on your U.S. tax return. However, timing differences can create problems. If the foreign country taxes the gain right away but the U.S. delays recognition, you may not be able to fully use the FTC, which could lead to double taxation. Some tax treaties help by providing credits, but they don’t override the basic rules of §1031. 
Besides capital gains taxes, Exchangers may face extra costs like stamp duties, value-added tax (VAT), or other transaction fees, making exchanges more complicated and expensive. These taxes usually can’t be recovered or deducted on a U.S. tax return, so it’s important to consider their impact. Another factor is estate and inheritance taxes, as some countries impose high taxes on property owned by non-residents. Using a foreign entity or trust to hold real estate might help reduce these risks, but it’s critical to properly structure a 1031 Exchange to follow both U.S. and foreign tax laws. 
Foreign Currency Factors 
Investing in foreign real estate comes with financial risks due to currency fluctuations, local market conditions, and regulatory factors. For a 1031 Exchange of foreign property, the Exchanger has two potential options for exchange funds to be held with the Qualified Intermediary (QI) in a United States bank. The first option is for the exchange funds to be held in the foreign currency within a foreign currency bank account; however not all banks can accommodate these types of accounts and there is additional documentation and security measures in place for holders of these accounts to reduce the banks associated risk with foreign money movements. The second option is to exchange the foreign currency into U.S. dollars. In this situation, the funds from the sale of the Relinquished Property are sent to the QI in the U.S. where they are converted to U.S. dollars prior to being converted back to the foreign currency to be wired internationally for the purchase of the Replacement Property(ies). During this process, exchange rates and additional transaction fees come into play, as the sale proceeds must be converted from U.S. dollars to the local currency for Replacement Property acquisition, requiring additional work for the QI to coordinate with banks.  
Since property values are based on the local currency, changes in exchange rates can significantly impact both the purchase and sale price when converted to U.S. dollars at the time of the Relinquished Property sale. If said foreign currency weakens against the U.S. dollar, the investment’s value may decline upon conversion. Currency shifts can also have tax consequences, as the IRS may treat significant exchange rate differences between sale and purchase as a foreign exchange gain or loss, potentially leading to extra tax liabilities. 
Market Risks 
In addition to currency fluctuations, inflation and interest rates in other countries can affect property values and loan costs. High inflation can reduce buying power, while changes in interest rates can make mortgages more expensive and impact demand for real estate. Additionally, some countries impose foreign exchange restrictions that limit the transfer of money across borders. If these restrictions tighten, it could become difficult for funds to be sent to the QI upon the sale of the Relinquished Property. 
Political and economic instability is another factor to consider. Changes in government policies, real estate regulations, or foreign ownership laws can lower property values and limit an Exchanger’s ability to buy, sell, or manage properties. In uncertain regulatory climates, unexpected restrictions on foreign real estate transactions can add even more unpredictability. 
 
Given the complexities of 1031 Exchanges involving foreign property, Exchangers should carefully evaluate any risks before proceeding and understand that due to the increased complexities involving foreign currency and the additional steps and scrutiny involved, the cost for a 1031 Exchange involving foreign property is significantly higher than a 1031 Exchange with domestic property. Working with experienced legal and tax professionals, as well as a Qualified Intermediary such as Accruit, can help navigate the challenges and maximize the benefits of a foreign property exchange. 
 
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.       
 

Selling foreign real estate and reinvesting in other foreign real estate through a 1031 Exchange presents unique challenges beyond those of a 1031 Exchange with domestic property. While tax deferral benefits can still apply, factors such as differing tax codes and fluctuations in currency and markets require careful planning. In this blog, we explore important considerations for Exchangers contemplating a 1031 Exchange involving foreign property.  
Foreign Property Is Not Like-Kind to U.S. Property 
In a 1031 Exchange, both Relinquished and Replacement Properties must be like-kind, meaning real estate held for business or investment can be exchanged for another, regardless of type (ex. a multi-family property for an office building). For U.S. exchanges, properties must be within the continental U.S. Puerto Rico is excluded, but the U.S. Virgin Islands may qualify. In the context of 1031, https://www.accruit.com/blog/1031-exchanges-involving-foreign-property”… properties can only be exchanged for other foreign properties, regardless of location. Domestic and foreign properties cannot be exchanged with each other. 
Tax Treatment in Foreign Jurisdictions 
When conducting a 1031 Exchange with foreign property, it’s crucial to understand how the tax laws of the foreign country may impact the transaction. While the U.S. allows tax deferral under IRC §1031, most other countries do not recognize this provision, potentially resulting in immediate tax liabilities. In some cases, foreign countries impose higher capital gains tax rates than the U.S. (as high as 50%), reducing the benefits of deferral. 
Another consideration is how foreign taxes interact with U.S. tax rules. If you pay capital gains tax in another country, you might be able to claim a foreign tax credit (FTC) or a deduction on your U.S. tax return. However, timing differences can create problems. If the foreign country taxes the gain right away but the U.S. delays recognition, you may not be able to fully use the FTC, which could lead to double taxation. Some tax treaties help by providing credits, but they don’t override the basic rules of §1031. 
Besides capital gains taxes, Exchangers may face extra costs like stamp duties, value-added tax (VAT), or other transaction fees, making exchanges more complicated and expensive. These taxes usually can’t be recovered or deducted on a U.S. tax return, so it’s important to consider their impact. Another factor is estate and inheritance taxes, as some countries impose high taxes on property owned by non-residents. Using a foreign entity or trust to hold real estate might help reduce these risks, but it’s critical to properly structure a 1031 Exchange to follow both U.S. and foreign tax laws. 
Foreign Currency Factors 
Investing in foreign real estate comes with financial risks due to currency fluctuations, local market conditions, and regulatory factors. For a 1031 Exchange of foreign property, the Exchanger has two potential options for exchange funds to be held with the Qualified Intermediary (QI) in a United States bank. The first option is for the exchange funds to be held in the foreign currency within a foreign currency bank account; however not all banks can accommodate these types of accounts and there is additional documentation and security measures in place for holders of these accounts to reduce the banks associated risk with foreign money movements. The second option is to exchange the foreign currency into U.S. dollars. In this situation, the funds from the sale of the Relinquished Property are sent to the QI in the U.S. where they are converted to U.S. dollars prior to being converted back to the foreign currency to be wired internationally for the purchase of the Replacement Property(ies). During this process, exchange rates and additional transaction fees come into play, as the sale proceeds must be converted from U.S. dollars to the local currency for Replacement Property acquisition, requiring additional work for the QI to coordinate with banks.  
Since property values are based on the local currency, changes in exchange rates can significantly impact both the purchase and sale price when converted to U.S. dollars at the time of the Relinquished Property sale. If said foreign currency weakens against the U.S. dollar, the investment’s value may decline upon conversion. Currency shifts can also have tax consequences, as the IRS may treat significant exchange rate differences between sale and purchase as a foreign exchange gain or loss, potentially leading to extra tax liabilities. 
Market Risks 
In addition to currency fluctuations, inflation and interest rates in other countries can affect property values and loan costs. High inflation can reduce buying power, while changes in interest rates can make mortgages more expensive and impact demand for real estate. Additionally, some countries impose foreign exchange restrictions that limit the transfer of money across borders. If these restrictions tighten, it could become difficult for funds to be sent to the QI upon the sale of the Relinquished Property. 
Political and economic instability is another factor to consider. Changes in government policies, real estate regulations, or foreign ownership laws can lower property values and limit an Exchanger’s ability to buy, sell, or manage properties. In uncertain regulatory climates, unexpected restrictions on foreign real estate transactions can add even more unpredictability. 
 
Given the complexities of 1031 Exchanges involving foreign property, Exchangers should carefully evaluate any risks before proceeding and understand that due to the increased complexities involving foreign currency and the additional steps and scrutiny involved, the cost for a 1031 Exchange involving foreign property is significantly higher than a 1031 Exchange with domestic property. Working with experienced legal and tax professionals, as well as a Qualified Intermediary such as Accruit, can help navigate the challenges and maximize the benefits of a foreign property exchange. 
 
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.