1031 Exchange Qualified Intermediary Eligibility and Compliance

To be eligible as a 1031 exchange qualified intermediary, you must be a qualified intermediary company or a qualified escrow agent.

A qualified intermediary company is one that meets the IRS requirements and has the necessary expertise to handle the exchange process.

To become a qualified intermediary, you must obtain a written opinion from an independent attorney or accountant that your company meets the IRS requirements.

This opinion letter must be updated annually to ensure your company remains compliant with the IRS regulations.

If this caught your attention, see: 1031 Exchange Replacement Property Rules

A 1031 exchange is a tax-deferral strategy that allows you to sell a property and use the proceeds to buy another "like-kind" asset without paying capital gains tax.

You'll have to pay taxes on the profit if you sell a property for $100,000 that you bought for $50,000, but a 1031 exchange can help you defer those taxes.

The rule is governed by Internal Revenue Code Section 1031(a)(1), hence the name 1031 exchange.

Additional reading: How to Report 1031 Exchange on 1040

To qualify for a 1031 exchange, your next property must be equal or greater in value than the property you just sold.

You'll also need a 1031 exchange intermediary to help facilitate the transfer, adding an extra layer of complexity to the process.

The Tax Cut and Jobs Act discontinued the practice of using 1031 exchanges with artwork, vehicles, and other personal property as of January 1, 2018.

You can't just use anyone as your 1031 exchange intermediary because IRS Section 1031 specifically states that an intermediary can't be a parent or child, nor a sibling. An intermediary also can't be an agent of yours, such as an attorney, CPA, real estate agent or broker.

In fact, anyone who has acted as an agent of yours in the last two years is disqualified from serving as your intermediary. This includes accountants, attorneys, and realtors who have worked on behalf of you in the last two years.

Explore further: Qualified Intermediary

While there are no official experience standards for an intermediary, it's crucial to hire someone with experience in managing 1031 exchanges to avoid any potential issues.

Here are some people who are eligible to be your Qualified Intermediary:

Note: While there are no official experience standards for an intermediary, it's essential to choose someone with experience to ensure a smooth exchange process.

A Qualified Intermediary's internal control processes are crucial to protecting your exchange funds. They should have a written policy outlining the safety measures in place to safeguard your money.

To ensure fund protection, a QI should call you and the closing agent prior to wiring the funds, as per the QI's internal policy. This is a critical step to prevent unauthorized access to your funds.

A Qualified Intermediary's internal control processes should include measures to prevent unauthorized access to your funds. This may involve multiple layers of authorization and verification before funds are released.

For your interest: Vanguard Exchange Funds

Here are some key internal control processes a Qualified Intermediary should have in place to protect your exchange funds:

By having these internal control processes in place, a Qualified Intermediary can help ensure that your exchange funds are protected and that you can successfully complete your 1031 exchange.

To qualify for a 1031 exchange, you must hold the same taxpayer for both the sold property and the replacement property. This means the qualified intermediary is the same taxpayer.

Only investment or business properties qualify for a 1031 exchange, so personal properties are not eligible. The two properties must also be like-kind properties, but all real property is considered like-kind.

You have a 45-day window from the transfer of the first property to identify a replacement property in writing and signed by the taxpayer. There are no exceptions, including weekends or holidays, for this identification.

The replacement property must be acquired within 180 days of the transfer of the relinquished property or whenever the taxpayer's tax return for the sale is due, whichever is first.

Discover more: Diverticulitis Qualify

A qualified intermediary (QI) is responsible for collecting funds, preparing documentation, and ensuring compliance with IRS guidelines. They'll also coordinate with the title company and receive funds after the sale of the first property, which will be deposited into a separate account.

Accruit holds a $50 Million Fidelity Bond, which exceeds best practices and state regulatory requirements. This provides an added layer of safety and security for investors.

Your QI will draft all the necessary paperwork, including contracts and documentation for the sale and purchase of both properties. They'll also work with the title company to ensure a smooth transaction.

A QI's role is to support investors throughout the entire 1031 exchange process, helping with tax and legal paperwork. They'll ensure that the exchange is completed in accordance with federal regulations.

Accruit also maintains $25 Million Errors & Omissions (E&O) insurance, which protects investors in case of any mistakes or oversights. This provides an added level of protection for your funds.

A QI's primary goal is to help you defer taxes on your capital gain, while also ensuring compliance with federal regulations. By working with a reputable QI, you can avoid unnecessarily high tax bills.

A different take: Etf Ticker Symbols

Qualified intermediaries must adhere to regulatory measures to ensure a smooth and secure 1031 exchange process. One key requirement is the establishment of qualified escrow and/or trust accounts for client funds.

These accounts provide a secure holding place for exchange proceeds, protecting both the client and the intermediary. The accounts also help to prevent unauthorized access or misuse of funds.

In addition to qualified escrow and/or trust accounts, intermediaries must also meet minimum bond and insurance requirements. This ensures that clients are protected in the event of any financial loss or damage. Fund withdrawal authorization requirements are also in place to prevent unauthorized access to client funds.

To give you a better idea, here are some regulatory measures in a concise format:

Preventing Employee Theft and Embezzlement is crucial to protect your funds from nefarious activity. Embezzlement is rare, but it's essential to have measures in place to prevent it.

You should find out if your QI's fidelity bond coverage is "per occurrence" or merely "in aggregate". It's also essential to ask the QI for proof that their coverage is still active and in full effect.

Regulatory Measures are in place to protect clients and ensure that Qualified Intermediaries (QIs) operate within the law.

Qualified escrow and/or trust accounts are required to hold client funds, providing an additional layer of security. This ensures that client funds are kept separate from QI business accounts.

Minimum bond and insurance requirements must be met to guarantee that QIs can cover potential losses. This provides peace of mind for clients and ensures that QIs are financially secure.

Fund withdrawal authorization requirements must be followed to prevent unauthorized access to client funds. This is a critical step in maintaining the integrity of the escrow or trust account.

Registration and licensing requirements for QIs ensure that they are properly qualified and authorized to operate. This helps to build trust with clients and ensures compliance with regulatory standards.

Investment limitations on exchange proceeds are in place to prevent QIs from engaging in high-risk investments. This protects clients from potential losses and ensures that QIs operate within a safe and secure framework.

Here is a summary of the key regulatory measures:

As an investor, it's essential to do your due diligence when selecting a qualified intermediary. Early involvement is crucial, as it allows the intermediary to guide you through the process and ensure a smooth exchange.

When choosing a qualified intermediary, look for someone with expertise in the field. This will give you confidence in their ability to handle your transaction.

Insurance and bonding are also vital aspects to consider. A reputable intermediary should have adequate insurance and bonding to protect your interests.

A thorough exchange agreement is another key consideration. This document outlines the terms and conditions of the exchange, so make sure it's comprehensive and clear.

Conservative account structures can also provide peace of mind. A well-structured account can help prevent errors and ensure that your transaction is completed correctly.

Additional reading: Health Insurance Exchange Cost