Overview of a Qualified Intermediary's Requirement, and Responsibilities in a 1031 Exchange

by Robert Taylor Real Estate Investment expert,1031 exchange

Finding a qualified intermediary is not an easy deed. For beginners, a successful 1031 Exchange is not a complete-it-yourself project. If you want to understand the tax deferral benefits, you must follow the IRS rules. You also may need a middle person, called a Qualified Intermediary (QI), also known as an Exchange Accommodator or Facilitator, and Qualified Intermediary Requirements.

Who Can Serve as Your Qualified Intermediary?

The investor can not directly sell the property, buy another, and expects to defer the capital gain taxes without the involvement of a QI. IRS section 1031 says that neither your parents, your siblings nor your child can behave as a middle person. It prohibits anyone who is regarded as "agent" such as broker, attorney, real estate agent, or CPA from serving as your QI unless if he has not represented you within the past two years.

Qualified Intermediary's Responsibilities in a 1031 Exchange

A Qualified Intermediary is important for the successful completion of a 1031 exchange and the investor must also be aware of the qualified intermediary requirement. Technically, QI sells your property on your behalf, then buys the new replacement property, and transfers the deed to you. It is his responsibility to hold the proceeds, prepare the legal documents, and provide assurance that the transaction is finished within the IRS guidelines.

To save tax deferral benefits and complete a successful 1031 exchange, you, the (exchanger or seller) must process a written agreement with a Qualified Intermediary before closing the sale of your existing property, known as the relinquished property.

Services of Qualified Intermediary

Following is a detailed explanation of the services provided by the Qualified Intermediary during a 1031 exchange.

Coordinates with the seller or exchanger and any adviser on the structure of the 1031 exchange
Prepares documentation related to the relinquished and the replacement property
QI provides the appropriate documents and instruction to the escrow or title company concerning the exchange.
QI Creates an arms-length transaction in the agreement between the seller and the QI, transfers the property you are selling to the qualified intermediary, who then passes the property to the new buyer
QI controls the funds from the sale of and deposits these funds into a separate account
QI does not allow you, the seller, to take constructive receipt of the proceeds from the sale.
QI holds the proceeds from the sale during the 45-day identification period
QI receives and holds the written information about replacement properties
After selecting the replacement property, he transfers the funds for the purchase and disburses them to the title or the escrow company.
Acquires the property in the QI's name and then transfers the title to the seller or exchanger by deed
QI submits complete accounting details of the 1031 exchange for your records