The role of the 1031 Exchange Accommodator otherwise known as a Qualified Intermediary, or QI, is to facilitate Internal Revenue Service (IRS) Code Section 1031 exchanges. The Regulations created four safe harbors for the purpose of determining whether or not the taxpayer has actual or constructive receipt of money or property while engaged in a 1031 exchange. Given the 1031 exchange utilizes one of the four safe harbors, the exchange will not be challenged by the IRS from the perspective of constructive receipt.
Safe Harbor No. 3 – Qualified Intermediaries
Safe Harbor Number 3 is found in Section 1.1031(k)-1(g)(iii), stating the QI is not considered an agent of the taxpayer for the purpose of the 1031 exchange. Anyone can be a QI with the exception of what the IRS recognizes as a disqualified person. A disqualified person is considered an individual or entity related to the taxpayer or who has acted as an agent for the taxpayer within two years of the transaction. There are exceptions including those who provide routine financial, title insurance, trust, escrow or closing services for the taxpayer by a financial institution, title insurance company, or escrow company per Regulation § 1.1031(k)-1(k)(2)(i)(ii). In three private letter rulings, the IRS established agency status is also determined by the test in National Carbide v. Commissioner (1949), in which four factors contribute to whether the agent:
- Operates in the name and for the account of the principal
- Binds the principal by its actions
- Transmits money received to the principal
- Whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal
1031 Exchange Accommodator Role
The QI has two primary functions. The first is to hold the exchange proceeds on behalf of the taxpayer during the exchange. This is accomplished by establishing an escrow account under the taxpayer’s tax identification number. A three party (taxpayer, bank and QI) Qualified Escrow Account is established requiring dual signatures to authorize the disbursement of funds. Interest earned can be to the benefit of the taxpayer, QI or blend of the two. Should the exchange proceeds exceed $2,000,000, interest equivalent to investment rate on a 13-week (generally, 91-day) Treasury bill must be paid to the taxpayer per Regulation § 1.468B. Washington, Oregon, Nevada, Virginia, California, Colorado, Idaho and Maine have legislated state laws regulating QIs accommodating exchanges for their residents. QIs who fail to comply are subject to criminal or civil penalties.
Regulation § 1.1031(k)-1(g)(6) requires that the taxpayer may not receive or have control over the exchange proceeds while in a 1031 exchange or the exchange will fail. The following constructive receipt verbiage must also be included in the primary Exchange Agreement.
“In no event shall Exchangor receive, pledge, borrow or otherwise obtain the benefits of the Exchange Account.”
The second function of the QI is to prepare exchange agreements supporting the taxpayer’s intent to initiate a 1031 exchange. In a two property forward exchange, a set of exchange agreements are prepared for each property closing. The QI will prepare settlement statement instructions for escrow, title company or closing attorney. Wire instructions are provided for the closing escrow to wire the exchange proceeds.
Finally, the 1031 Exchange Accommodator provides the taxpayer and their financial counsel a listening board and respective responses to the variety of questions that surface when considering a 1031 exchange.
Care should be given to the selection of a 1031 Exchange Accommodator. Price alone should not be the primary decision factor. Benefit from the questions seasoned individual and corporate investors ask when vetting a QI by clicking here to receive “Four Questions to Ask Your QI.”
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
