How To Become A 1031 Qualified Intermediary

If y'all've been following along with our seven-part series on 1031 Exchange basics, you know that we've already covered the starting time three of the six basic requirements. At present, we are moving on to the fourth requirement, using a Qualified Intermediary. The IRS requires the process of a 1031 Exchange to be documented and managed past the Qualified Intermediary. In this article nosotros volition discuss the requirements for a Qualified Intermediary (QI). Both their office in the commutation process and what to look for your QI.

1031 Exchanges Require a Qualified Intermediary

The IRS has a strict set of rules and time limits that you must stick to in social club to qualify for a 1031 Exchange. Using a Qualified Intermediary to document all the transactions of your exchange and hold your proceeds is role of those rules. The IRS code states that an unrelated tertiary political party must document and manage just the 1031 Exchange role of the transaction. During the exchange process, you volition apply the services of your usual and familiar existent manor professionals. This may include a real estate attorney, a title visitor, an accountant for tax reporting, and probably several existent manor agents. A Qualified Intermediary is simply another professional person that is added during a 1031 Exchange. In addition to their mandated office, a good QI will also act as your guide through the procedure.

Something of import to note hither is that the Qualified Intermediary MUST be involved before the closing of the auction of your investment holding. A 1031 Exchange starts with the sale of a piece of investment existent manor and ends with the purchase of replacement belongings. Just this simply works if your Qualified Intermediary is in place prior to the auction.

Who Tin can Be Your Qualified Intermediary?

The Qualified Intermediary is an unrelated third political party. While nosotros take mentioned a "third party" before, it'due south important to emphasize that the Qualified Intermediary must truly be a third party. It cannot be your attorney, real manor agent, husband, or wife, etc. It has to be a completely unrelated party where all they do for yous is document and manage your 1031 Exchange.

While the statue isn't completely clear on what "qualified" is, it is crystal clear on what disqualifies someone from this role. That is: if there's an agency relationship, a business concern relationship or a family unit relationship, the person or entity would be butterfingers. This substantially means that equally long as you oasis't purchased used tires from the used tire shop down the road, they could technically deed as the Qualified Intermediary. However, that's clearly not in your best interest. To empathize why, let'south take a look at exactly what the Qualified Intermediary does.

What does the Qualified Intermediary Exercise?

The Qualified Intermediary will work aslope you lot and the rest of your regular professionals to document the entire 1031 Substitution and hold the proceeds from your sale. At a minimum, this includes:

• Creating an exchange agreement (betwixt QI and the investor)
• Providing the assignment of contract rights (signed by the investor and enacted by the title company)
• Giving notification (all parties to the transaction have to be notified – no standard of when)
• Receiving and maintaining sale proceeds during the transition into the new investment/until the finish of the exchange

Permit's take a closer await at these official aspects of the QI's office.

EXCHANGE Agreement

There volition demand to be an exchange agreement betwixt you and your Qualified Intermediary that lays out all of the requirements we discuss in this article series. This agreement will specify what your office is going to be, what you're going to take to do to end the exchange, and what the Qualified Intermediary is going to exercise for you. This exchange understanding volition be your contract with them.

Assignment OF RIGHTS

As part of the process of using the Qualified Intermediary, there must exist an assignment of rights. This is where yous assign your rights to the sell the property to your Qualified Intermediary. Many states and jurisdictions already accept real estate contracts that have check the boxes or default cooperation addendums for a 1031 Exchange. If that is not the case with your contract, nosotros recommend you simply make your contracts assignable if possible. Regardless, this assignability and the exchange documents prepared by your QI let the title company to direct deed the backdrop from the exchanger to the heir-apparent and from the seller to the exchanger.

Note that your QI should never take championship to either the relinquished or replacement properties. The QI is the assignee merely on the settlement statement. This is an aspect of the assignment of rights that should be discussed in your Qualified Intermediary selection process (meet more beneath).

NOTIFICATION

The statute does not specify how or when the parties to the exchange must be notified, only that it is required. Some exchangers have experienced more than aggressive bargaining situations when the seller realizes a 1031 Substitution is in process. As a result, virtually QIs opt to provide this required discover as part of the closing process.

RECEIPT AND MAINTENANCE OF PROCEEDS

For an exchange to be valid, the investor may not have bodily or constructive receipt of the proceeds from the sale of their relinquished property. Retrieve how we said before that you lot must have the Qualified Intermediary before you lot close the sale of your investment holding? Part of the reason why is that later on the closing of the auction, your proceeds must go into an commutation account with the Qualified Intermediary. The IRS considers funds in escrow with the championship company constructive receipt by the seller, so the funds must be transferred to the QI. Then, when you purchase your replacement property, the funds will exist transferred by the QI directly to the championship company for closing.

Finding and Hiring the Right Qualified Intermediary

As your QI has to be an unrelated third political party and will exist property meaning cash on your behalf, nosotros recommend you look for someone that meets these 5 criteria:

1. Uses dual signatory segregated, qualified escrow accounts for your commutation funds (at no charge).
2. Guarantees their exchange documentation.
3. Provides support and documentation in the case of an IRS audit (at no charge).
4. Is easily accessible to answer questions (at no charge).
5. Has extensive, verifiable feel and a solid reputation.

While the exchange fee charged is a consideration, at that place is a range and a variety of potential boosted charges among QIs who meet the above criteria. We recommend you check out our previous article on how much an exchange should cost to see what you should be paying and what your fee covers.

Don't miss the adjacent part of our series on the 1031 Commutation basics, when we'll be talking about all of the necessary title requirements.

Originally posted on The Bigger Pockets Member Weblog.

Source: https://www.the1031investor.com/qualified-intermediary-requirements/

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