What is a Qualified Intermediary? 

Qualified Intermediary Explained 

A Qualified Intermediary (QI) is an independent third party that facilitates Internal Revenue Code (IRC) Section 1031 tax-deferred exchanges. Prior to the issuance of the IRS Treasury Regulations in 1991, the buyer was an integral part of the Sellers choice to do an exchange.  The regulations allowed for a Qualified Intermediary to fill that role and be the party with whom the Exchanger is exchanging with. According to the Regulations for an intermediary to be considered “qualified”, it cannot be an agent of the exchanger at the time of the transaction. The Qualified Intermediary must enter into a written agreement for the exchange with the Exchanger, as well as acquire and transfer the Relinquished and Replacement Properties on behalf of the Exchanger, as required by the terms of the exchange agreement.  The acquisition of the sale property, referred to as the Relinquished Property, and the new property being purchased, referred to as the Replacement Property, can be accomplished in a number of ways. However, it is typically satisfied under the rules by the exchanger assigning the rights of the Exchanger under the contracts and providing notice to all parties of such assignment. 

Role & Purpose of a Qualified Intermediary: 

The role of the Qualified Intermediary is to act as a middleman in the real estate transaction, handling the acquisition and transfer of property and ensuring that the many specific detailed rules set forth in the regulations are being followed and the integrity of the exchange is intact to achieve tax deferral.  

It is also necessary under the rules that the Exchanger avoid actual or constructive receipt of the proceeds of the Relinquished Property sale during the period of time between the sale and the purchase.  The Regulations suggest several ways to ensure the Exchanger is not deemed to have access to those funds, but generally it is satisfied by the Qualified Intermediary holding those funds on behalf of its client, the Exchanger. That is a secondary role it fills. 

In short, the purpose of a Qualified Intermediary is to act as a party who the Exchanger can actually exchange with and to keep the transaction in compliance with the many details set forth in the Regulations. Secondarily, it acts as a convenient party to safeguard the exchange funds during the transaction and ensure the Exchanger is not in actual or constructive receipt of them.    

Benefits of a Qualified Intermediary: 

As noted above, the Qualified Intermediary offers many different benefits in the 1031 Exchange process, as it is a nuanced topic that requires deep knowledge. A few advantages to having a QI include their expert knowledge on the rules and regulations of 1031 Exchanges, as well as IRS guidelines, ensuring compliance and reducing the risk of disqualification. They safeguard the funds generated from the sale of the Relinquished Property, holding them in a secure account to prevent direct receipt by the Exchanger. A QI ensures that the Replacement Property is acquired within the strict 180-day timeframe required by the IRS. This time management allows investors to successfully complete the exchange and defer capital gains tax. 

Choosing a Qualified Intermediary: 

Selecting the right Qualified Intermediary is essential for the success of a 1031 Exchange. It's important to consider several critical factors when making this decision: 

Experience: Seek out an established QI with a demonstrated track record and extensive experience in facilitating 1031 Exchanges. A seasoned QI will possess the necessary expertise to guide you through the process and minimize potential risks. Seek QIs with a deep bench of 1031 Exchange experts including staff attorneys, CPAs, as well as Certified Exchange Specialists®. 

IRS Compliance: Ensure that the Qualified Intermediary you select strictly adheres to all IRS regulations and guidelines. Request and research references and testimonials to verify their compliance history and credibility.  

Security and Protection: Assess the level of security and protection provided by the QI. Verify their use of reputable and highly rated banking institutions to hold the funds. Inquire about the QI's fidelity bond and errors and omissions coverage to protect against unforeseen circumstances. 

Customer Service: The chosen Qualified Intermediary should prioritize exceptional customer service. They should be readily available to address your questions and concerns throughout the exchange process. 

Professional Affiliations: Look for a QI affiliated with professional organizations such as the Federation of Exchange Accommodators (FEA). Membership in such organizations indicates a commitment to maintaining industry standards and best practices. 

When entering a 1031 Exchange, it is crucial to involve a Qualified Intermediary. They facilitate and handle the exchange of funds and property while ensuring regulatory compliance, providing for tax-deferred status. While it is not only paramount to involve a QI in your transaction, choosing the right one is just as important. As a leading Qualified Intermediary, learn more about Accruit’s boutique-style service and factors in our success here. 

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.