1031 CORP. recently conducted new research that uncovered key challenges to achieving the many benefits of 1031 exchanges. What we found is that, even if your strategy and motivation are solid, you might not always complete a successful exchange.
We set out to learn why.
We surveyed 407 participants, including CPAs, attorneys, accountants, residential and commercial real estate professionals, financial advisors, and title/escrow officers, along with real estate investors across all experience levels.
The good news: There are five core steps to bridge the gap between strategy and execution.
The research findings point to clear actions that will lead to greater success for real estate investors considering a tax-deferred 1031 exchange, also known as a like-kind exchange, and advisors making recommendations.
Five Core Steps for More Successful Exchanges
Based on our new research, 1031 CORP. identified five core steps that support better outcomes for investors and the professionals who advise them:
- Start the conversation earlier.
- By introducing the 1031 exchange option during disposition planning, you can avoid a mad rush the week before closing.
- By introducing the 1031 exchange option during disposition planning, you can avoid a mad rush the week before closing.
- Connect the exchange to what investors care about.
- Leading with property values, cash flow, and market conditions allows a 1031 exchange to support long-term goals.
- Leading with property values, cash flow, and market conditions allows a 1031 exchange to support long-term goals.
- Provide role-appropriate guidance.
- Remember that different advisors play different roles in the process. By using clear communication and defined handoffs, advisors can help exchanges stay on track and create a better experience.
- Remember that different advisors play different roles in the process. By using clear communication and defined handoffs, advisors can help exchanges stay on track and create a better experience.
- Get ahead of replacement property anxiety.
- Begin the property search before the relinquished property is even listed.
- Begin the property search before the relinquished property is even listed.
- Build trust through transparency.
- By keeping all parties informed and coordinated throughout the exchange, everyone feels more confident moving through the process.
The biggest hurdle: Getting to the first exchange
Once investors experience how a 1031 exchange can preserve and grow their equity over time, it tends to become a regular part of how they invest. 74% of investors who complete the first exchange go on to become repeat exchangers, most commonly completing three to five exchanges over time. And 95% report feeling confident in the rules and process after that first exchange.
The key is making sure they know the option is available and that they have the right support when they're ready to use it.
We learned that investors and professional advisors alike gather information from a variety of sources, including through referrals. However, we recommend securing professional guidance from someone who knows the industry and can bring clarity and direction to the overall strategy.
Following these five steps will be key to successful exchanges.
1. Start the conversation earlier.
Earlier planning leads to better outcomes.
Involving a Qualified Intermediary (QI) early on can give investors more time to evaluate their options and make the 45-Day Identification window and 180-Day Exchange period more manageable.
Investors who begin 1031 planning during the disposition process, rather than shortly before closing, have more time for a thorough replacement property search and significantly less timeline pressure once the exchange is underway. When they don’t, those same deadlines can narrow options quickly and put investors in a difficult position.
Notably, 97% of investors who have never completed an exchange say they would consider one if they had better information. Start the 1031 conversation before a property hits the market to make sure everyone understands their options before a sale is already in motion.
2. Connect the exchange to what investors care about.
Today’s market realities make the stakes feel higher.
83% of professionals surveyed say interest rates are affecting how their clients view investing right now.
Investors are asking whether this is the right time to make a move, whether they will find a suitable replacement property within the required timeline, and whether the numbers make sense in the current rate environment. These are fair questions and addressing them early in the process makes a real difference.
Education and experience can be a superpower. It’s important for investors to partner with advisors who bring both to the table.
3. Provide role-appropriate guidance.
Not all investors or advisors are starting from the same place.
Our research identified three investor profiles that tend to show up most often in 1031 exchange conversations. Each brings a different set of priorities and questions to the table:
- The Active Repeater has completed multiple exchanges and understands how the process works. In today's market, their focus is on cash flow, finding strong replacement properties, and keeping the timeline manageable across what are often more complex transactions.
- The Beginner is aware of 1031 exchanges but hasn't completed one yet or has done only one or two. The biggest barriers are uncertainty around finding a replacement property in time and not fully understanding the rules.
- The Lifestyle Shifter is looking to simplify. They may want to step back from active property management, consolidate holdings, or plan for the long term through estate planning strategies. For this group, passive investment options like Delaware Statutory Trusts (DST), Triple Net Leases (NNN), and oil & gas royalties often come into the conversation.
Understanding which of these profiles is most applicable to your situation helps shape the right conversation from the start.
Different professional advisors see different pain points based upon their role in the transaction. A one-size-fits-all strategy does not work. While residential agents might find their clients are stressed about tax implications or finding a replacement property, commercial brokers’ clients are more concerned about depreciation recapture and capital gains, and title and escrow professionals are worried about documentation and assignment requirements.
Every professional—including the above, CPAs, accountants, attorneys, and financial professionals—is going to follow a slightly different playbook.
4. Get ahead of replacement property concerns.
Prospective 1031 exchangers face a dilemma: You can’t start looking for a replacement property until after you’ve listed, but the 45-day clock doesn’t start till you close. Or so they think.
Earlier planning can break the cycle. Begin the property search before the relinquished property is even listed and start putting together a replacement property list. Engaging a QI at this stage will help you understand your options, and if you find your perfect property first, consider a reverse exchange as a creative alternative solution.
5. Build trust through transparency.
Having the right QI partner is essential because they can help reduce risk and enable earlier, confident conversations. Rely on the QI to follow the rules and coordinate exchange documentation and timelines. They are the hub that connects all relevant parties in the transaction.
By keeping everyone informed and coordinated throughout the exchange, each will feel more confident throughout the process.
What Comes Next?
The compounding effect of 1031 exchanges is one of the most powerful tools available to real estate investors. With the right resources and partners, more investors can take full advantage of it.
Have questions about 1031 exchanges or want to talk through a specific situation? Contact us at 1.800.828.1031 or request a complimentary consultation.
