1031 Exchange Lawyers: Risks, Solutions, and How to Pick

In some regions of the country, it is common for attorneys to act as closing agents in connection with the sale and purchase of real estate. When acting as a closing agent, the attorney receives the purchase price from the buyer and, once the closing occurs, disburses it to the seller. If you are doing a 1031 exchange and your attorney acts as the closing agent, is this a problem?

Let’s look at some of the risks and solutions associated with hiring a 1031 exchange lawyer. But first, we’ll discuss what a 1031 exchange is and how it works. 

IRC Section 1031

Under IRC Section 1031 and the deferred exchange regulations, a taxpayer can defer taxes by selling their relinquished property and acquiring replacement property at a later date. Provided that all of the rules are followed, the transaction is considered an exchange rather than a sale followed by a purchase. For this to happen, the taxpayer cannot have actual or constructive receipt of the proceeds from the sale (these proceeds are referred to as the “exchange funds”).

The Main Risk When Acquiring Replacement Property

Since in most cases the buyer’s attorney handles the closing, an issue of integrity may come up most often when the buyer is completing his exchange by acquiring the replacement property. One view is that the buyer’s attorney is the agent of the taxpayer and may compromise the exchange by handling the exchange funds when closing the deal. The opposing view is that the buyer’s attorney should be able to handle the funds because the attorney acts as closing agent with duties to all parties, not just to the buyer.

Practical Solutions to the Problem

If your attorney or you are concerned about this issue, and you want to have the attorney continue to act as the closing agent, one solution is to have the purchaser’s qualified intermediary send the exchange funds directly to the seller. Other common options are to have the title insurance underwriter, an escrow company or an attorney who is not an agent of the taxpayer handle the receipt and disbursement of the funds.

Can My Attorney Be My Qualified Intermediary?

A separate, but related, question is whether a taxpayer’s attorney may act as the intermediary in the exchange. The IRS rules provide that an attorney cannot act as a qualified intermediary for a client if the attorney has performed services for the client any time during the two-year period ending on the date the relinquished property closes, unless those services are limited to the client’s 1031 exchange.

A cautious attorney will consider alternatives before handling funds on either side of his client’s exchange transaction and will seek the assistance of a qualified intermediary instead of attempting to act in that capacity. At First American Exchange, we can help find solutions to these and other issues that often come up in a taxpayer’s exchange. Please contact us if we can be of assistance.

What to Look for In a 1031 Exchange Lawyer

Due to the legal and tax complexity involved, choosing the right 1031 exchange lawyer is one of the most important steps in ensuring your exchange is valid and beneficial. Here’s what to look for when selecting legal counsel for a 1031 exchange: 

1. Specialized Experience with 1031 Exchanges 

Not every real estate attorney is familiar with 1031 exchanges. You need a lawyer who regularly handles these transactions and understands the Internal Revenue Code §1031, Treasury Regulations, and related IRS rulings. Look for: 

• A proven track record of successfully completed exchanges 

• Experience working with investors, developers, and commercial property owners 

• Familiarity with reverse and improvement (construction) exchanges, not just basic ones 

An experienced 1031 attorney can help structure your transaction properly, anticipate potential issues, and ensure you meet all statutory deadlines.

2. Deep Understanding of Real Estate and Tax Law

A 1031 exchange is both a real estate and a tax event. The best lawyers have expertise that bridges both domains. They should understand: 

• State and federal real estate transfer laws 

• How depreciation recapture and boot affect tax outcomes 

• The implications of different ownership structures (LLCs, partnerships, trusts) 

• How state-level taxes or withholding rules may apply 

This cross-disciplinary knowledge helps ensure your transaction is not only IRS-compliant but also optimized for your overall financial situation.

3. Ability to Coordinate with Qualified Intermediaries (QIs)

A 1031 exchange must be facilitated by a qualified intermediary (QI). Your lawyer should have established relationships with reputable QIs and understand how to: 

• Review exchange agreements to ensure they adequately protect your funds and interests 

• Review escrow instructions, settlement statements and assignment documents 

• Confirm that the QI maintains proper security for client funds 

Lawyers who regularly coordinate with QIs can help you avoid common pitfalls, such as mishandling sale proceeds or missing the 45-day identification or 180-day closing deadlines.

4. Strong Communication and Transaction Management Skills

A 1031 exchange often involves multiple parties — buyers, sellers, real estate agents, lenders, accountants, and intermediaries. Your lawyer should be a skilled communicator and project manager who can: 

• Keep all parties aligned and informed throughout the exchange timeline 

• Explain complex tax rules in clear, understandable language 

• Ensure documentation and filings are accurate and timely 

Effective coordination helps prevent costly delays or disqualifying errors. 

5. Transparency on Fees and Services

Look for a lawyer who provides clear, upfront estimates and explains what services are included. Transparency about costs helps you avoid surprises later on.

6. Positive Reputation and Client References

Reputation matters. Before hiring a 1031 exchange lawyer, research their professional background: 

• Check online reviews, peer ratings, and testimonials. 

• Ask for client references, especially from investors with similar property types or transaction sizes. 

• Confirm they are in good standing with the state bar and have no disciplinary history. 

A well-regarded attorney with a strong reputation in real estate and tax law will give you added confidence that your exchange is in capable hands.

First American Exchange Company Can Meet Your Needs

Having an experienced real estate and tax attorney can help you with your 1031 exchange, but you should do some due diligence to ensure they are the best fit. The best 1031 exchange lawyer combines technical expertise, real estate and tax fluency, clear communication, and strategic foresight.

By choosing counsel who meets these criteria, you’ll reduce the risk of IRS disqualification, ensure smooth execution, and make the most of the powerful tax benefits that a 1031 exchange provides. If you’re ready to get your 1031 exchange started, get in contact with First American Exchange Company today.