Qualified Intermediaries Are Third Parties Who Facilitate 1031 Exchanges
A Qualified Intermediary is a person or company who is used to facilitate a property exchange under Section 1031 of the IRS code. Under the IRS, code a Qualified Intermediary is not allowed to be the person who is making a property exchange, nor can s/he be a disqualified person. However, as a rule, a disqualified person under this piece of legislation would be the person making the 1031 exchange.
There are a number of stipulations and regulations that a Qualified Intermediary must follow to facilitate an exchange, most of which are outlined in Section 1031 of the IRS code. It is the job of the Qualified Intermediary to follow the 1031 exchange rules;
- Coordinates a property exchange for the benefit of the exchanger, through liasing with the exchanger and various agents such as lawyers, accountants and real estate brokers or agents
- Prepares and makes sure that all of the documentation necessary to facilitate an exchange under Section 1031 is accurate, complete and relevant
- Provides an escrow service for delayed exchanges, ensuring that all funds are kept in a secure bank facility until they are needed to finalize the exchange (they are not allowed to be re-invested)
- Ensures that the escrowed money is allocated to the respective parties of the exchange when instructed to do so.
The Qualified Intermediary is introduced into the real estate exchange process once the sale of the first property is completed. The Qualified Intermediary transfers the sold property to the new owner and receives payment for that transaction. He then holds the funds for the exchanger until a new replacement property is found, at which time he orchestrates the transferral of funds so that the process qualifies for Section 1031 deferral.
One of the reasons that a Qualified Intermediary is used in these property exchanges is that it prevents the exchanger from actually having the money from the proceeds of the sale of a property, in his or her possession. Because the exchange process under Section 1031 defers all payments of capital gains tax (which would usually be payable on the sale of a property), it is important that the IRS is shown that the money from the sale of one property is invested into a similar (like-kind) property within a specified time span. By placing the funds from the sale of the first property into escrow with a Qualified Intermediary, the exchange process is said to be transparent, and the deferment of capital gains tax is allowed.
Because of the nature of the services that the Qualified Intermediary provides within the real estate sector, it is important that any Qualified Intermediary used has the adequate qualifications and experience to deal with IRS documentation, financial escrow services, secured deposit services and basic accounting and legal knowledge.
Getting the Most of Your Investments: Real Estate Taxes and the Capital Gains Tax
