The Treasury Department governs 1031 exchanges, and they’ve made one thing very clear: These are not do-it-yourself real estate ventures. In fact, you won’t be able to use your parents, child, or sibling, or even your attorney, real estate agent, or CPA as a middle person in the exchange and still expect to defer capital gains taxes.
The IRS requires that you use a professional Qualified Intermediary, also called an Exchange Accommodator or Facilitator if you want to preserve the tax benefits available to you through the completion of a successful 1031 exchange. You must have a written agreement with a Qualified Intermediary executed before the sale of your existing property.
A Qualified Intermediary is a person or company that is in the full-time business of facilitating tax-deferred exchanges such as 1031s. You cannot have had a financial relationship with them for at least two years prior to the close of escrow to the exchange.
A professional QI handles all the funds from the sale of the original property and holds them until they are needed to purchase the exchange property. The QI then delivers the money directly to the closing agent, who, in turn, delivers the deed to the real estate investor. In addition, a QI can:
- Help you arrange the structure of the exchange.
- Prepare documents related to both the relinquished and replacement properties
- Give instructions and documents to the escrow or title company
- Submit an accounting of the exchange for your records
- Prepare a 1099 for you and the IRS that details any interest earned.
As you would before hiring any professional, when looking for a Qualified Intermediary, be sure to ask for and check references and confirm that the QI has a fidelity bond or fidelity insurance, an indicator of the QI’s ethical past. The right QI will be a safeguard who assures your exchange meets all the complex requirements and rigid deadlines, and that you end up in with successful and secure like-kind exchange.