The Role of a Qualified Intermediary in a 1031 Exchange
For those new to 1031 Exchanges, some of the procedures and new terms thrown around can be mind numbing! Take the Qualified Intermediary for example (also known as an accommodator, facilitator or QI), what makes them qualified and exactly why do we need them?
To qualify for a 1031 like-kind property exchange, the transaction has to be done in accordance to the detailed rules, regulations and compliance issues set forth in the tax code.
A Qualified Intermediary, or exchange accommodator, is critically important to the transaction under the Internal Revenue Code. Your first step in setting up a 1031 exchange would be to choose a competent Intermediary to facilitate the exchange. The Qualified Intermediary should be a corporation that is in the full-time business of facilitating 1031 exchanges.
A 1031 Qualified Intermediary is an independent and professional facilitator who receives the funds from the original sale and holds the funds until they are needed to purchase the new exchange property. The Qualified Intermediary then directly delivers the money to the closing agent who delivers the deed directly to the real estate investor.
According to the Internal Revenue Code a "disqualified person" who may not serve as a Qualified Intermediary would include anyone with whom the exchanger has had a business or family relationship prior to the transaction, for example a spouse, sibling, other family member, employee, attorney, broker, etc. This also includes any corporation where 10% of the outstanding stock is owned by or for the taxpayer. It must be an independent organization whose only contact with the exchanger is to serve him as a Qualified Intermediary.
The QI is responsible for protecting the integrity of the transaction, along with knowing all of the current regulations when performing the following activities in a 1031 Property Exchange:
Acquiring the Relinquished Property from the taxpayer,
Transferring the Relinquished Property to the buyer,
Acquiring the Replacement Property from the seller and
Transferring the Replacement Property to the taxpayer.
The Qualified Intermediary is responsible for the proper preparation of all documentation and filling out the appropriate tax forms in compliance with regulations, for the client. A QI typically provides three different documents: the exchange agreement, an assignment, and a notice. The exchange agreement is a contract between the client and the exchange accommodator that sets out the rules, which must be followed in order to complete the 1031 exchange. The assignment of the sales contract to the Qualified Intermediary must also be in place. The reason for this is because the QI is basically acting as their client in selling the property. The third document the QI provides is a notice to the party on the other side of the transaction advising that the transaction is a 1031 exchange. The purpose of notification to the other party is to prove that the exchange was in place at the closing.
An exchanger must do their homework when selecting a qualified intermediary. There are hundreds of QI's providing exchange services out there today, however many of them do not have sufficient insurance, bonding, financial backing, and experience that they should. Exchange funds are often under-insured and under-protected. When there is any amount of your investment dollars at risk you want to be sure to choose a solid company with years of experience in handling 1031 exchanges.
The Qualified Intermediary and Like-Kind Exchange
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