This Tuesday’s Tip will explain the vital role of the Qualified Intermediary (QI) in a 1031 tax-deferred exchange. A QI is essential to successfully completing the transaction and an experienced QI will help keep the process simple for all parties. The use of a QI is provided by the safe harbor regulations of Section 1031 and their role is to act as a middleman in both the sale and purchase transactions.
Who is Qualified?
A QI is not the agent of the Exchanger for purposes of a 1031 exchange. To be “qualified,” the QI must not be the actual Exchanger or the Exchanger's accountant, attorney, real estate professional, financial planner, employees, partners or close relative.
“The Exchange” of Properties
Through an Exchange Agreement, the rights to the relinquished property are assigned from the Exchanger to the QI and the QI agrees to convey those rights to the buyer. The rights to acquire the replacement property from the seller are assigned to The QI and the QI then conveys to the Exchanger. All conveyances are done via direct deeding from seller to buyer as in any typical real estate transaction.
Documentation
The QI prepares the Exchange Agreement as well as the notifications and assignments for the Agreements of Sale for the relinquished and replacement properties. We also prepare instructions and coordinate the details with the parties closing the sale and purchase transactions.
Control Exchange Proceeds
The QI controls the exchange proceeds so the Exchanger never has actual or constructive receipt which would create a taxable event. 1031 CORP. holds the funds in an interest-bearing, FDIC insured account set up for the benefit of the Exchanger. Our clients have the ability to view their account via the website of the financial institution where the funds are held. The Exchanger would be required to provide written authorization before any funds can be withdrawn from the exchange account.
When Should a Qualified Intermediary Be Retained?
Ideally, the QI should be in place during the planning stage to keep the process simple and worry-free for all parties. The QI must be in place prior to the actual conveyance from the Exchanger to the buyer. A Taxpayer may elect to complete a 1031 exchange as late as at the closing table, but once the conveyance has occurred, it is too late to initiate an exchange.
Advantage of Working with QI
When working with 1031 CORP., you benefit from our 21 years of experience and our commitment to keep the process simple for you. We strive to exceed your expectations. Our Exchange Team is always available to answer questions (yes, you will have our cell phone numbers!).
