Selecting a 1031 Exchange Advisor: What To Consider

Selecting a 1031 Exchange Advisor: What To Consider
Written By
Carl E. Sera, CMT
Published On
November 27, 2023

Are you considering investing in a Delaware Statutory Trust (DST) as part of a 1031 exchange? This type of investment can offer tax advantages and passive income potential, making it attractive for many investors. Working with the right exchange advisor is crucial for ensuring a successful and profitable investment. Continue reading to discover the key factors to consider when selecting a 1031 exchange advisor.

What Is a 1031 Exchange?

A 1031 exchange, or a like-kind exchange, permits investors to defer capital gains taxes on the sale of a property by reinvesting the proceeds into another property of equal or greater value. This investment enables investors to grow their real estate portfolio continually without being hindered by taxes.

Who Is a 1031 Exchange Advisor?

A 1031 exchange advisor specializes in guiding businesses and people through the 1031 exchange process. Think of them as the team captain. All teams need a qualified leader with a wealth of knowledge about a particular subject. These advisors are typically certified public accountants (CPAs), qualified intermediaries, or attorneys who have a vast wealth of tax law and real estate knowledge. These people understand the intricacies of Section 1031 of the Internal Revenue Code. They will serve as a strategic partner, the keyword being “partner.” You deserve to work with someone who has your back.

A qualified intermediary (QI) is integral to the 1031 exchange process. They act as a neutral third party who holds the funds from the sale of your relinquished property and transfers them to the seller of your replacement property. Working with a reputable and experienced QI to handle the exchange properly is essential for the success of the process.

Your advisor will walk you through the exchange process. Having a 1031 advisor by your side will maximize the financial benefits of your 1031 exchange and simplify the process.

Top Responsibilities

Executing a 1031 exchange is complex, but you don’t have to do it alone. A 1031 exchange advisor will handle the following responsibilities:

  • Prepare the required documentation
  • Ensure everything adheres to the IRS rules
  • Handle strict deadlines
  • Recognize suitable replacement properties

Why are these responsibilities important? If a taxpayer fails to meet a deadline, the IRS could disqualify the transaction from the 1031 exchange treatment. This mistake would result in significant tax liabilities. What do these timelines look like? Your advisor will guide you through the 45-day identification period and the 180-day exchange period, ensuring you meet the requirements and qualify for tax deferral benefits.

Consider Their Experience and Expertise

When choosing a 1031 exchange advisor, consider their experience in handling DST investments. A qualified intermediary with a good track record of facilitating successful DST exchanges can provide valuable insights throughout the process. They should also understand the unique tax implications and requirements for DST investments.

Evaluate Their Communication and Accessibility

Effective communication is vital to any business transaction, and this is especially true for a 1031 exchange. Your advisor should be responsive, accessible, and able to simplify complex information regarding your investment. Additionally, they should keep you up-to-date on the progress of the exchange.

If you notice that your advisor takes too long to return a phone call or email, that’s a red flag. Do they neglect to break down the financial language in a way you can understand? That’s another red flag with their communication style.

Look for a Proven Track Record

A reputable 1031 exchange advisor should have a proven track record of successful DST investments. This proof can include previous clients’ testimonials, case studies, or other evidence showcasing the advisor’s expertise with DST exchanges. We recommend researching the advisor’s reputation and credibility through online reviews or industry associations. Pay attention to green flags, such as positive affirmation of the advisor.

This information will inform you how well the advisor will work for you. Do they have more negative reviews than positive ones? You should continue looking. Other red flags, like the repeating issues popping up in reviews, will help you decide if the partnership will or won’t yield success.

Get Familiar With Their Network and Resources

Having a well-established network and access to various resources can benefit your DST investment. A reputable 1031 exchange advisor should have connections with experienced sponsors, brokers, and other professionals in the real estate industry. This broad network can provide you with diverse investment options and enable you to receive expert advice from various perspectives.

Understand Their Fee Structure

Before selecting a 1031 exchange advisor, you should understand their fee structure and how it aligns with your investment goals. Some advisors may charge a flat fee, while others have a percentage-based fee structure. Discuss these fees upfront with your potential advisor, and fully understand the costs associated with the exchange.

Look for a Transparent and Ethical Advisor

Transparency and ethics are crucial for financial investments. A reputable 1031 exchange advisor should operate with integrity and provide all the necessary information to help you make informed decisions about your investment. They should also adhere to all legal and ethical standards set by governing bodies, such as the IRS and the Securities and Exchange Commission (SEC).

Seek Personalized Guidance

Every investor’s financial situation and goals are unique. Your 1031 exchange advisor should provide personalized guidance for your investment. They should take the time to understand your objectives and risk tolerance to recommend suitable DST options. This individualized attention can help you make an informed investment decision.

Closing Thoughts

As with any investment, selecting the right advisor is crucial to the success of turning your 1031 exchange into a Delaware Statutory Trust. With careful consideration and thorough research, you can find a qualified intermediary who will help you navigate the complex world of DST investments and guide you toward a profitable investment. Do your due diligence, and select an advisor who will work in your favor.

Sera Capital’s advisors check all the boxes. Our extensive knowledge allows us to take calculated risks and help our clients with challenging situations. In fact, we appreciate challenges and put an emphasis on transparency. Use our 1031 exchange services, and trust our expert advisors with your needs.

Selecting a 1031 Exchange Advisor: What To Consider

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 16 years of experience in the financial services industry with a focus on investment management.

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