Qualified intermediary
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The Qualified Intermediary (also known as an Accommodator) should be a corporation that is in the full-time business of facilitating 1031 exchanges. The role of a QI is similar to, but not identical to, the role of an escrow company. The Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:
- Coordinates with the exchangers and their advisors, to structure a successful exchange.
- Prepares the documentation for the Relinquished Property and the Replacement Property.
- Furnishes escrow with instructions and documents to effect the exchange.
- Secures the funds in an insured bank account until the exchange is completed.
- Provides documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow.
- Holds the document of Identification of Replacement Properties sent by the Taxpayer.
- Submits a full accounting of the Exchange Funds for the Taxpayers Records.
- Submits a 1099 to the Taxpayer and the IRS for any growth proceeds paid.
Anyone who is related to the taxpayer, or who has had a financial relationship with them within the two years prior to the close of escrow of the exchange can not be used as the QI. This means that the taxpayer cannot use their current attorney, certified public accountant or real estate agent. A corporation or other entity to act as Qualified Intermediary owned by your CPA, CPA firm, real estate agent or attorney is likewise disqualified.
A Qualified Intermediary should be bonded and insured against errors and omissions and employee dishonesty. Relevant educational background such as tax, law or finance is desired. Nevada is the only state that requires a QI to be licensed.
In order to take advantage of the qualified intermediary "safe harbor" there must be a written agreement between the taxpayer and intermediary expressly limiting the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary. The intermediary can act with respect to the property as the agent of any party to the transaction and further, an intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to the agreement are notified in writing of the assignment on or before the date of the relevant transfer of property. This provision allows a taxpayer to enter into an agreement for the transfer of the relinquished property (i.e., a contract of sale on the property) and thereafter to assign his rights in that agreement to the intermediary. Providing all parties to the agreement are notified in writing of the assignment on or before the date of the transfer of the relinquished property, the intermediary is treated as having entered into the agreement and, upon completion of the transfer, as having acquired and transferred the relinquished property.
The QI holds the proceeds from the sale of the relinquished property beyond the actual or constructive control of the Exchangor. The Qualified Intermediary also prepares the necessary documents to accomplish a tax deferred exchange.
[edit] Questions to ask a Qualified Intermediary
- Where will the exchange funds be held? (If held in a bank, are you aware that FDIC coverage is only for $100,000 per account?
- In what type of account are the funds invested?
- Are separate accounts set up for each client?
- What are the requirements for the withdrawal of any exchange proceeds? (Is the Qualified Intermediary authorized to move funds without the Taxpayer’s written approval?)
- Is the notarized signature of the Exchanger required for moving funds at all times? (What written documents specify this requirement?)
- Can a written 3rd Party Guaranty be provided to all Exchangers? (Is this backed by a recognizable entity with an established track record and sufficient assets to cover a potential loss of exchange proceeds?)
