The Role of Qualified Intermediary In A 1031 Like Kind Exchange

Exchanging is a creative method for marketing property. Section 1031 of the Internal Revenue Code (IRC) offers a golden opportunity to motivated real estate buyers to defer the capital gains tax liability associated with the sale of a business or investment asset. 1031 exchanges ensure maximum return on investments to people of all financial backgrounds. However, to qualify for 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.

Also known as a facilitator or exchange accommodator the Qualified Intermediary serves a critical function under the Internal Revenue Code. Choosing an Intermediary to facilitate the 1031 exchange is the first and most important step. The Qualified Intermediary should be a corporation that is in the full-time business of facilitating 1031 exchanges. The Internal Revenue Code requires that the person or entity serving as QI cannot be someone with whom the exchanger has had a business or family relationship prior to the transaction. It has to be an independent organization whose only contact with the exchanger is to serve him as a QI.

A Qualified Intermediary must be used to facilitate the 1031 Exchange Transaction. By definition 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.

The QI is responsible for 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 QI can perform all these without ever actually taking title to either of the properties. The QI is responsible for properly filling out the appropriate tax forms 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 QI that sets out the rules, which must be followed in order to complete the 1031 exchange. The assignment of the sales contract to the QI must also be in place. This is because, theoretically, the QI steps into the client's shoes and sells 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 be particularly aware of selecting a qualified intermediary before going into the transaction. There are hundreds of qualified intermediaries providing like-kind exchange services today, but most of them don't have the necessary insurance, bonding, financial backing, transactional structure, and internal controls that should be required of them. Exchange funds are often grossly under-insured, under-protected, and at risk. In today's volatile economic climate, choosing a financially solid, time-tested 1031 qualified intermediary with the necessary financial strength, resources and backing are crucial for the safe completion of a 1031 like-kind exchange transaction.