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Section 1031 allows you to roll the gain from the sale of your Old Property to the purchase of your New Property. To do this, you have to jump through certain hoops. We've talked in previous articles about how your property has to be held for investment and that it can not be held for resale.

We've also talked about the requirement to identify potential replacement properties for your exchange and how you have to complete a list of these potential properties within 45 days. We talked about the requirement that whatever you purchase must be on your 45 day list. And then last month we talked about how your money must be held by an independent third party called a Qualified Intermediary (QI) and how you must make sure that the intermediary holds your money in an account separate from other exchanges.

Section 1031 allows you to roll the gain from the sale of your Old Property to the purchase of your New Property. To do this, you have to jump through certain hoops: we've written previously about how your property has to be held for investment and that it can not be held for resale. We've talked about the requirement to identify potential replacement properties for your exchange and how you have to complete a list of these potential properties within 45 days with the stipulation that what ever you purchase must be on your 45 Day List. We also talked about how your money must be held by an independent third party called a qualified intermediary and how you must make sure that the intermediary holds your money in an account separate from their other exchanges. And last month we talked about the requirement that you need to take title to the new property in the same name or entity that held title to your Old Property.

Interest rates on separate exchange accounts are currently in the toilet. So it’s not surprising that taxpayers who are doing 1031 exchanges are intrigued with Qualified Intermediaries that offer a high rate of interest on their exchange accounts. But how are they earning those rates? If you use them to do your exchange, what will they be investing your money in? Will you even know where your money is?

Most intermediaries commingle their client’s money. By commingle, I mean the pooling of all the clients’ exchange funds into one account. The benefit of pooled accounts is that the intermediary is investing a larger amount of money, and is therefore able to obtain a greater return. Just look in the business section of your Sunday paper: you’ll notice the difference in interest rates on $1,000 invested in a money market account versus $1 million invested in a CD.

...A 1031 exchange is a relatively short-term event, but losing your money could be forever...

The 1031 Exchange area is so broad that you could spend days teaching the details of the topic. Most of you, however, want to simply introduce the topic to your students, and you should be able to do that adequately in about an hour. This article gives you an outline and the basic concepts that will let you do just that.