How a Qualified Intermediary Faciliates a 1031 Exchange
Trying to find a qualified intermediary is no easy feat. For starters, a successful 1031 Exchange is not a do-it-yourself project. If you want to realize the tax deferral benefits, you must follow the IRS rules. You also may need a middle person, called a Qualified Intermediary (QI), sometimes known as an Exchange Accommodator or Facilitator.
Who Can Serve as Your Qualified Intermediary?
You simply cannot sell a property, directly buy another, and expect to defer capital gains taxes without a QI. IRS Section 1031 specifies that neither your parents nor your child nor your sibling can be your middle person. It prohibits anyone regarded as your "agent" such as your attorney, broker, CPA or real estate agent from serving as your QI, unless this person has not represented you within the past two years.
Overview of a Qualified Intermediary's Responsibilities in a 1031 Exchange
A Qualified Intermediary is essential to the completion of a successful 1031 exchange. Technically, he or she sells your property on your behalf, buys the new replacement property, and then transfers the deed to you. It is the QI's responsibility to hold the proceeds, prepare the legal documents, and attempt to ensure that the transaction is completed within the IRS guidelines.
To preserve tax deferral benefits and complete a successful 1031 exchange, you, the (seller or exchanger) must execute a written agreement with a Qualified Intermediary before closing on the sale of your existing property, known as the relinquished property.
Qualified Intermediary's Services
Following is a detailed point-by-point explanation of what a Qualified Intermediary does for you during a 1031 exchange.
- Coordinates with you (the seller or exchanger) and any adviser on the structure of the 1031 exchange
- Prepares documentation concerning the relinquished property and the replacement property
- Provides instructions and the appropriate documents to the escrow or title company concerning the exchange
- Creates an arm’s-length transaction in the agreement between you (the seller or exchanger) and the Qualified Intermediary, transfers the property you are selling to the QI, who then conveys the property to the new buyer
- Takes control of the funds from the sale of the relinquished property and typically deposits these funds into a separate and insured account
- Does not allow you, the seller, to take constructive receipt of the funds from the sale.
- Holds the funds from the sale of the relinquished property during the 45-day identification period
- Receives and holds the written information about potential replacement properties
- When the replacement property has been selected, transfers your funds for the purchase and disburses them to the title or escrow company for its purchase
- Acquires the replacement property in the QI's name and then conveys title to you (the seller or exchanger) by deed
- Submits a complete accounting of the 1031 exchange for your records
- Submits a 1099 to you (the seller or exchanger) and the IRS for any paid growth proceeds (interest earned)
The IRS rules have led to the development of new businesses devoted to 1031 exchanges, many of whom are affiliated with title companies. Before you hire a professional Qualified Intermediary, ask for references, and make sure the individual has errors and omissions plus fidelity insurance to protect you against fraud or negligence.
An easy way to find a qualified intermediary is to ask your local escrow officer for a recommendation. Escrow officers deal with qualified intermediaries all of the time.
A word from the author: This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.
Edited by Elizabeth Weintraub, Home Buying Expert
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.