If you’re considering a 1031 exchange to defer capital gains taxes, then there are some important terms you should be familiar with, like a qualified intermediary. In the world of 1031 exchanges, a qualified intermediary (QI) is essential for executing the exchange process. Let’s explore what 1031 exchange qualified intermediary means and how it works.
What Is A Qualified Intermediary?
A qualified intermediary acts as the middleman between the seller and buyer of a property in a 1031 exchange. The role of the QI is to hold on to the proceeds from the sale of the first property and to ultimately deploy those funds to acquire another replacement property or properties as part of a like-kind exchange.
A qualified intermediary is an independent third party that ensures all 1031 exchange requirements are met. They also protect against potential claims by creditors or other parties who may have an interest in any of the properties involved in your exchange.
Is a 1031 Exchange Qualified Intermediary Required?
When two parties are involved in a direct exchange, there’s no need for the services of a Qualified Intermediary. In this case, it is just the Taxpayer and Buyer engaged in a transaction.
It is mandatory to enlist a Qualified Intermediary when three or four parties partake in the exchange of property. This includes a Taxpayer and both Buyer and Seller of said old/replacement property.
According to the Internal Revenue Code’s section 1031, taxpayers cannot come into physical contact with any exchange funds or net equity from selling a property. A Qualified Intermediary creates an escrow account to rectify this issue and ensures compliance. This account holds these funds, making it easier than ever for investors to securely receive their profits without violating tax code rules.
Qualified Intermediary Requirements
When choosing your qualified intermediary, it’s important to make sure they meet certain qualifications set out by law. Specifically, they must not be related to either party in any way—not even as an employee or consultant—and must not have acted as an advisor on tax matters for either party during the past two years.
Qualified intermediaries must also have experience with 1031 exchanges and be knowledgeable about relevant tax laws and regulations. This includes providing advice regarding which property should be acquired with proceeds from selling your first property. QIs must agree to act solely as intermediaries without acting on behalf of either party in any other capacity whatsoever.
When selecting your QI, ensure that you feel comfortable with them and their qualifications. Take your time making this decision because it can have serious implications if something goes wrong.
What Should I Expect From Working With My Qualified Intermediary?
When you hire a qualified intermediary, you should expect them to handle all aspects of your 1031 exchange transaction from start to finish. This includes:
- Completing all necessary paperwork
- Filing any required documents with the IRS
- Setting up an escrow account for funds
- Transferring funds between parties involved in the transaction
- Keeping track of deadlines associated with the exchange.
Most importantly, qualified intermediaries should provide clear communication throughout every step so that you understand what is happening at every point in time during the process.
How to Find a Qualified Intermediary: 1031 Exchange
Finding a qualified intermediary (QI) to facilitate a 1031 exchange can feel overwhelming, but it doesn’t have to be. Start by checking with your real estate agent, attorney, or another financial advisor who can refer you to an experienced QI. Do some research into the qualified intermediaries’ backgrounds and reputation so that you can feel confident in their ability to handle your transaction.
Look for designations such as Certified Exchange Specialist from the Federation of Exchange Accommodators or Accredited Exchange Consultant from the American Society of Exchangers. Additionally, ensure that the QI you choose is willing and able to provide reliable customer service during your transaction.
Check out review sites like Yelp and Google Reviews for feedback from past clients and read up on any consumer complaints filed against them with the Better Business Bureau. Remember to get a written statement outlining the QI’s fee structure before signing on the dotted line.
Who is Disqualified from Acting as a Qualified Intermediary?
A qualified intermediary (QI) is a person or entity that facilitates certain transactions between parties, such as the real estate exchange. However, some people are disqualified from serving as QI and would not be able to act in this capacity.
Generally, any person or entity disqualified from participating in U.S. securities offerings is also disqualified from acting as a QI. Other disqualifying factors may include:
- A criminal record
- Past bankruptcies
- Severe financial difficulties
- A fiduciary relationship with one of the parties involved in the transaction
Additionally, non-U.S. citizens and non-U.S.-based entities are generally prohibited from serving as QI. It’s important to ensure that your chosen QI meets all of the requirements for qualification before proceeding with any transaction.
Is My Money Safe at a Qualified Intermediary?
When dealing with any financial transaction, it’s important to ensure that your money will be kept safe. When you select a QI to help facilitate a 1031 exchange, know that they are legally obligated to hold any funds related to the exchange in segregated accounts.
This means that their funds cannot be commingled with any other customers’ funds and must be kept aside in an account dedicated to the customer.
Most QIs also maintain fidelity bonds or errors and omissions insurance as additional customer protection. Finally, verify that the QI you choose is regularly audited so you can know that your money is protected throughout the process.
A qualified intermediary plays an essential role when completing a 1031 exchange – but only if they meet certain legal requirements and you feel comfortable with them overall.
It’s important to do your due diligence so that everything runs smoothly throughout your entire exchange process. This can make or break whether or not you benefit from deferring capital gains taxes!
Whether you’re a seasoned investor or just starting, Point Acquisitions is the premier provider of 1031 exchange services. With years of experience in helping clients navigate this complex process quickly and easily, we are your go-to choice for all things related to 1031 exchanges. Contact us today and discover how our knowledgeable team can help make your next investment venture easier than ever!
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