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If you're considering a 1031 exchange to defer capital gains taxes, understanding the role of a qualified intermediary (QI) is essential. This professional, also known as an “exchange facilitator,” is pivotal in helping investors navigate the complex steps required to complete a 1031 exchange successfully. Below, we summarize the key responsibilities of a QI and guide what to look for when selecting the right professional for your exchange.
For more detailed insights, read the full article by Michael Packman in the New York Real Estate Journal.
The Role of a Qualified Intermediary
A QI performs several critical tasks in a 1031 exchange, including:
Documentation and Compliance: Compiling and submitting essential documents to title companies and escrow agents.
Fund Management: Holding and controlling exchange funds in secure accounts to ensure compliance with IRS regulations.
Property Transfer: Managing arm's-length negotiations and transferring the sold property without direct access to sale proceeds for the seller, a requirement to avoid IRS disqualification.
Replacement Property Identification: Maintaining written records and managing funds during the 45-day property identification period.
Final Settlement: Coordinating fund disbursement to complete the property purchase and submitting a detailed transaction account to the investor.
What to Look For When Hiring a Qualified Intermediary
When choosing a QI, consider these essential qualities:
References and Insurance: Ensure they provide references and carry fidelity and errors and omissions insurance to safeguard against negligence or fraud.
Independent Status: The IRS requires that QIs be neutral third parties, meaning that family members, close friends, and recent business associates are not eligible.
Expertise in Tax Law: Ideally, choose a QI who works alongside tax professionals or is experienced in real estate tax law. This expertise is crucial for staying updated on tax code changes that impact 1031 exchanges.
To make the most of a 1031 exchange, partnering with a reputable and experienced QI is essential. By selecting a skilled professional, you can navigate the complexities of the exchange process smoothly and maximize your tax benefits.
04/15/2019