A qualified intermediary (QI) is a neutral party who may assist a landowner in facilitating a like-kind exchange. The QI can also be known as a facilitator or exchange accommodator. A tax professional can help determine whether a QI is necessary to facilitate a particular like-kind exchange, and whether a specific party can serve as a QI.
How it works:
The QI enters into a written agreement, known as the exchange agreement, with the landowner. The agreement sets up the rules and guidelines for exchanging the properties. Under that agreement the QI acquires the landowner’s property from the landowner, transfers that property, acquires the replacement property, and transfers the replacement property to the landowner. All of this can be done without actually transferring title to the QI. However, the QI will play an important role in filling out the appropriate tax and assignment forms.
When you choose to use a QI, the IRS does not consider you to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent who deeds the property directly to the taxpayer.
Choosing a QI:
Choosing a QI to facilitate the 1031 exchange is usually the first and one of the most important steps. The QI should be a company that works full-time in the business of facilitating 1031 exchanges. You should use extreme care when selecting a QI because the industry is largely unregulated. Consider the financial stability of the QI and ensure that the QI is bonded and insured.
The Internal Revenue Code (IRC) requires that a QI be an independent organization whose only contact with you is to serve as the QI. Thus, the person or entity serving as QI cannot be someone that you have had a former business or family relationship with prior to the transaction. A QI cannot be either landowner, their employee, attorney, accountant, investment banker, or real estate agent or broker. There must be a significant amount of separation between the QI and the landowners, because if it is determined that the QI is a disqualified person, the QI will be treated as the landowner's agent, which will jeopardize the exchange.
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