1031 Exchange: What is a Qualified Intermediary and Do You Need One?

Couple checking details of property being traded

Couple checking details of property being tradedUsing a qualified intermediary is vital to the success of a 1031 exchange transaction. While the entire process is straightforward, IRS rules are complex, and one misstep could void the benefits of a 1031 exchange. So to leverage the deferred tax benefits that a 1031 exchange could provide, you’ll need help from a qualified intermediary, notes 1031 Exchange Place.

What does a qualified intermediary do?

A 1031 exchange qualified intermediary is responsible for selling your property, purchasing the like-kind real estate investment, and transferring the deed over to you. Your qualified intermediary would likewise be responsible for safeguarding the proceeds of the sale, preparing all the relevant documentation, and making certain that the 1031 exchange transaction would be completed with the guidelines of the IRS.

To take advantage of the deferred tax benefits and complete the transaction, you, as the exchanger or seller, should enter into a written agreement with your qualified intermediary prior to closing your existing property, or relinquished property’s, sale. But who could perform the tasks of a qualified intermediary?

The IRS guidelines state that neither your children, nor parents, nor siblings could serve as you qualified intermediary. The IRS likewise forbids any individual considered an agent of yours, including your real estate agent, lawyer, CPA, or broker, to serve as your qualified intermediary unless this specific individual hasn’t represented or worked with you within the last two years.

Hiring a qualified intermediary for a 1031 exchange

Before hiring a qualified intermediary, you should do your due diligence and research his or her credentials, references, and experience with 1031 exchanges. Likewise, check if the qualified intermediary has omissions and errors, as well as fidelity insurance coverage to help safeguard you against potential negligence or fraud.

It’s also imperative that you seek advice from your tax advisor when entering into a 1031 exchange transaction to help make certain that the entire process is in full compliance with IRS guidelines. You need to make sure that your qualified intermediary knows about specific IRS private letter rulings that could make the IRS disqualify him or her as your qualified intermediary.

Remember, working with an experienced, qualified intermediary is essential to the success of your 1031 exchange so make sure that you find someone that could get the job done as quickly and smoothly as possible.