Qualified Intermediary 1031

Posted on | by Andy Gustafson

Qualified Intermediary 1031A Qualified Intermediary of 1031 tax deferred exchanges was instituted by the Internal Revenue Service and Department of Treasury in 1991 as one of four safe harbors to eliminate problems associated with taxpayers having access or control to their exchange proceeds. “A Qualified Intermediary under Safe Harbor No. 3 is not considered the agent of the taxpayer for purposes of a tax-deferred exchange. The taxpayer’s transfer of relinquished property and subsequent receipt of like-kind property is treated as an exchange and the determination of whether or not the taxpayer is in actual or constructive receipt of money or other property before the taxpayer actually receives like-kind replacement property is made as if the QI is not the agent of the taxpayer.” [1]

Qualified Intermediary Role

The role of a Qualified Intermediary in a 1031 exchange is to hold the exchange proceeds or cash due to the seller in a safe, liquid, non-commingled account for use towards the purchase of replacement property. The 1031 Qualified Intermediary prepares assignments, notice of assignments and exchange agreements with Internal Revenue Code required language to reflect the intent of the taxpayer to effectively defer capital gains and recaptured depreciation taxes by exchanging real or personal property held in the productive use of a business or investment of equal or greater value.

1031 Exchange Rules

There are many 1031 exchange rules that apply to the variety of individuals, partnerships, limited liability companies and corporations, both domestic and foreign and array of transactions. The use of a Qualified Intermediary in a 1031 exchange is required unless both the seller and the buyer want each other’s property. This is known as a pure exchange. As long as the fundamental 1031 exchange rules are followed, a Qualified Intermediary is not required. The basic 1031 exchange rules are:

  • The taxpayer who sells is the taxpayer who buys
  • The replacement property is equal to or greater in price to the property sold
  • The exchange is completed within 180 calendar days from the day following the first leg closing
  • The replacement property is formally identified no later than the forty-fifth calendar day post-closing
  • Real property is exchange for real property while personal property is exchanged for like-class, like-kind personal property
  • Property held within the United States is exchanged for property located in the United States, while property held internationally is exchanged for property held overseas
  • Disqualified persons cannot perform the role of a Qualified Intermediary
  • Property can be sold to related parties but must be held for two years
  • Replacement property can be acquired from a related party if the Seller is also initiating a 1031 exchange

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1031 Exchange Taxpayer Checklist[1] Reg. § 1.1031(k)-1(g)(4)(i)