What Does The 1031 Exchange Qualified Intermediary Do?

What is a 1031 Exchange Qualified Intermediary, often referred to in the industry as an Accommodator or Facilitator, and what does one do?  Generally, a Qualified Intermediary is an entity established solely to administer an investors' tax-deferred exchange transactions under Section 1031 of the Internal Revenue Code ("1031 Exchange" and "Tax Code").  Qualified Intermediaries should have the necessary background to help investors navigate through their 1031 Exchange transaction.

An professional and experienced 1031 Exchange Qualified Intermediary is a critical part in the structuring and completion of a successful 1031 Exchange transaction.  Qualified Intermediaries, is authorized and required under Section 1.1031 of the Treasury Regulations and is the central component in any 1031 Exchange.

Licensing and Regulation of Qualified Intermediaries

Qualified Intermediaries are generally not required to be licensed, regulated, or audited by any governmental agency or regulatory body.  Qualified Intermediaries are not required to be bonded, insured or maintain any amount of equity capitalization. 

This lack of governmental oversight is beginning to change.  Arizona, California, Colorado, Idaho, Maine, Minnesota, Nevada, Oklahoma, Oregon, Texas and Washington are either considering, or have passed, new state legislation covering 1031 Exchange Qualified Intermediaries.

Professional and reputable Qualified Intermediaries understand this and will have made arrangements to ensure they are bonded, insured, adequately capitalized and licensed (where possible). 

Exercise Care in Choosing Your 1031 Exchange Qualified Intermediary

You should be very, very careful when selecting your 1031 Exchange Qualified Intermediary due to the crucial role the Qualified Intermediary will play in administering your tax-deferred exchange.  You should Google topics such as "Choosing a 1031 Exchange Safe Qualified Intermediary" for help in evaluating potential Accommodators.

The Role of the Qualified Intermediary

Qualified Intermediaries are responsible for many important steps in the administration of a successful 1031 Tax Deferred Exchange, including (1) drafting your 1031 Exchange agreements and documents to properly structure your 1031 Exchange; and (2) receiving and safeguarding your net proceeds/exchange funds through the tax-deferred exchange transaction; and (3) advising or consulting with you and your legal, tax and financial advisors about your 1031 Exchange transaction to ensure compliance with all applicable Tax Codes, Treasury Regulations and related IRS Rulings.

Preparation of Legal Documents

The proper drafting of your 1031 Exchange agreements and documents is a crucial part of a successful 1031 Exchange transaction.  Mistakes in the preparation of your documents could end up disqualifying your 1031 Exchange transaction with the recognition of the depreciation recapture and capital gain tax liabilities.Qualified Intermediaries must have the necessary experience and expertise to ensure a thorough review of the related purchase and sale agreements and related documents as well as a complete understanding of your 1031 Exchange.  This indepth understanding of your transaction by your Qualified Intermediary will ensure the 1031 Exchange agreements and related documents will be completed accurately.

Safeguarding Your 1031 Exchange Funds

Another responsibility that is arguably just as critical and important is the holding and safeguarding your 1031 Exchange funds.  Qualified Intermediaries hold your 1031 Exchange proceeds for up to 180 calendar days to prevent constructive receipt and/or actual receipt of your 1031 Exchange funds by you.

Qualified Intermediaries hold significant amounts of 1031 Exchange net proceeds for thousands of investors and therefore have a tremendous trust and fiduciary duty to protect all of the client funds.

Technical Ability: Providing Advice and Guidance

One of the most frustrating issues for investors is preparing and planning for their 1031 Exchange transaction.  You have probably spoken to one Qualified Intermediary and received one answer and then spoken to another and received a completely different answer.  Then consulted with your legal, tax and financial advisors and received three more completely different answers.  The problem is the Tax Code, Treasury Regulations and various court decisions that have been handed down leave many unanswered questions, which in turn creates many gray areas in the 1031 Exchange industry.

Therefore, one of the most important roles for the Qualified Intermediary to ensure that its 1031 Exchange experts are sufficiently trained and have sufficient knowledge to provide the help investors navigate through the complexities and grays areas of the 1031 Exchange. 

Qualified Intermediaries Can Not Be Disqualified Person

Certain people are specifically prohibited from serving as your 1031 Exchange Qualified Intermediary. You are can't serve as your own Qualified Intermediary.  Your real estate broker, securities broker, attorney, or accountant, or an otherwise disqualified person under Section 267(b) and 707(b) of the Tax Code can not serve as your Qualified Intermediary.  Related parties can generally not serve as a Qualified Intermediary.

Further, although an individual may serve as a Qualified Intermediary, it is not recommended because the death, divorce or bankruptcy of the individual may have a catastrophic effect on your 1031 Exchange transaction and/or otherwise compromise the 1031 Exchange funds.  You should always choose a professional, experienced, institutional Qualified Intermediary that has years of experience and expertise specifically in the administration of tax-deferred exchange transactions.