1031 Qualified Intermediary

The exchanging taxpayer is not allowed to hold or have access to the proceeds of the relinquished property sale while the exchange is being executed: between the date relinquished property is transferred to the buyer and the taxpayer takes title to all replacement property. The Internal Revenue Service has provided alternative methods of safeguarding againstpossession by the taxpayer. These are Safe Harbors specified in the Regulations. The most common Safe Harbor used by taxpayers is a Qualified Intermediary. This is a third party, unrelated to the taxpayer by family or business ties, who holds the taxpayer's sales proceeds and is usually the receiver of the taxpayer's replacement property identifications.

It is also the role of the Intermediary to dispose of the taxpayer's relinquished property and acquire new replacement property for the taxpayer. With the proper documentation, that can be done with direct deeds between the taxpayer and the buyer and seller of those properties, without the Intermediary actually appearing in the chain of title.

The Qualified Intermediary provides all exchange documentation, the IRS-mandated paperwork that turns an ordinary sale and purchase or property into a tax-deferred exchange and should be relied on to coordinate the execution of the exchange in compliance with IRS Code and Regulations.

What Makes the Intermediary Qualified?

Because the purpose of the Intermediary is to keep the taxpayer from having actual or constructive receipt of the sales proceeds, certain persons are specifically restricted from acting as the taxpayer's Qualified Intermediary. Those persons include anyone who is related to the taxpayer, is the employee or agent of the taxpayer, or is related to an employee or agent of the taxpayer. Specifically excluded are the taxpayer's attorney, accountant, investment banker or broker, or real estate agent or broker, if non-exchange services have been provided within the two years prior to the exchange.

The definition of "qualified" under the Regulations is any entity not "unqualified" as identified above. The Intermediary should also be qualified in the sense that he or she is honest and competent in handling the taxpayer's exchange transaction. Taxpayers contemplating a tax-deferred exchange should assure themselves that their Qualified Intermediary is experienced in tax-deferred exchanging and has an impeccable reputation for honesty and expertise. Are they bonded?  Will they prove my funds are completely segregated and provide transparency for the growth proceeds?