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Qualified intermediary rules for 1031 tax exchanges

Qualified Intermediary Rules for 1031 Tax Exchanges

Considering a 1031 tax exchange for your next real estate transaction? If so, you’re already on the right track: a 1031 exchange represents a great opportunity for real estate investors to temporarily defer payment of capital gains taxes on their investments. The legal 1031 tax exchange has helped many investors rapidly grow the value of their holdings and keep control of their tax obligations. If you’re new to the 1031 exchange process, however, it is important to understand an important concept: the qualified intermediary.

Your qualified intermediary must be an approved, uninvolved third party. This person or entity is responsible for holding the proceeds of your first sale until they are needed to purchase your replacement property. This person or entity will also handle many of the detailed paperwork requirements inherent in taking any such 1031 exchange successfully from start to finish.

The “uninvolved” part of the qualified intermediary stipulations, however, can be difficult. This rule notes that you cannot employ as a qualified intermediary anyone who has acted as your agent in the past two years – meaning that any brokers, real estate agents, attorneys, or bankers with whom you have a pre-existing relationship are out. The rationale for this stipulation is unsurprising: the regulatory authorities want to be sure that the qualified intermediary will in no way be tempted to use the proceeds of the sale in a questionable manner that might be in your benefit but at odds with the law.

One important thing to keep in mind, however, is that you can work with a qualified intermediary if you have not entered into a transaction with this person within the past two years. This two-year window is calculated from the date that your relinquished property (the original property you are selling) is officially transferred to its new owner. In the case of a 1031 tax exchange with multiple relinquished properties, the first relinquishment date is used. This clause means, then, that you may use a qualified intermediary with whom you have a former relationship that is no longer current.

This important exclusion allows you to do business with individuals and entities with whom you have some degree of familiarity and comfort – without running the risk of going afoul of regulations and endangering the integrity of the exchange. No matter who you choose to act as your qualified intermediary, remember that the choice of a qualified intermediary is critical to the success of your 1031 exchange: this individual or entity will play an incredibly important role in the completion of your 1031 tax exchange.

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