What Does a Qualified Intermediary Do?

If you are new to the process of using 1031 exchanges, you likely have come across the term ‘qualified intermediary’ but you might not necessarily know what a qualified intermediary actually does. Read on to learn more about the key role that qualified intermediary plays. A qualified intermediary refers to an eligible individual who enters into an agreement with the IRS. Essentially this means that the qualified intermediary is empowered to act in 1031 exchanges on behalf of a taxpayer. Under this agreement, the qualified intermediary agrees to maintain certain withholding responsibilities and documentation in exchange for simplified information reporting. In simple terms, as an investor however, this individual is empowered to act as a qualified intermediary under the internal revenue code.

This refers to an individual who will accept and apply funds on your behalf during the process of a 1031 exchange. Anyone who is related to the taxpayer and has had some kind of financial relationship with the taxpayer within the two years prior to the escrow closing date cannot serve as a qualified intermediary. This means that as a taxpayer you can’t use your certified public accountant, current attorney or real estate agent. It is also important to look for a qualified intermediary who is bonded and insured against errors and omissions. On a more professional level it is also a good idea to look for a qualified intermediary who has a relevant background such as that in tax law or finance.

While in the majority of states a qualified intermediary does not have to be licensed, looking at an individual’s background and asking for some references can give you a good idea of whether the person you intend to work with is the right fit for your situation or not. The qualified intermediary should be professional and have experience in handling exchanges like this before. Since you are entrusting some financial responsibility to the qualified intermediary, it should always be someone that you trust. An experienced individual will have a background in doing this and likely some recommendations from other individuals who have used him or her in this capacity. Doing your research and identifying the appropriate qualified intermediary can give you a greater level of trust with this person as you begin to engage in the process of a 1031 exchange. Hiring the right person can have a significant impact on your business future.