How a Qualified Intermediary Facilitates a 1031 Exchange

Carl E. Sera, CMT
Carl E. Sera, CMT
Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 14 years of experience in the financial services industry with a focus on investment management.

1031 exchange specialistsA 1031 exchange isn’t a Do-It-Yourself process. You must adhere to strict IRS regulations and requirements to successfully realize the tax deferral advantages. One of the major IRS requirements is hiring a Qualified Intermediary or Accommodator or Facilitator before you begin the whole exchange process.

Who is a Qualified Intermediary?

A Qualified Intermediary is a neutral third-party individual or company who is charged with the responsibility of facilitating or handling a 1031 exchange process. Under the IRS section 1031, a qualified intermediary MUST not share any relationship or ties with the taxpayer. So, your parents, relatives, children, or spouse cannot act as your facilitator.

Also, it specifies that any individual considered as ‘your agent’ or on your payroll cannot act as your middlemen. Therefore, your CPA advisor, real estate agent, attorney or broker cannot act as a qualified intermediary on your behalf.

Roles of a Qualified Intermediary in a 1031 Exchange

A qualified intermediary serves in numerous roles and capacity in a 1031 exchange. Please discuss with your chosen qualified intermediary to find out more about the function they offer and how it would add value to the exchange process.

  1. A qualified intermediary is responsible for structuring the 1031 exchange process. Since they are familiar with the process, they understand what the IRS wants in terms of structure and make sure it meets IRS requirements.
  2. Answer all your questions. Your qualified intermediary is on hand to answer any question you may have about doing a 1031 exchange. Before hiring a qualified intermediary, you should ensure that he or she is responsive and available.
  3. Prepares exchange documents. The 1031 exchange is a complex process and requires lots of paperwork. You will need documents on the relinquished and replacement property and it is the duty of a qualified intermediary to prepare these documents at all time.
  4. Receives and Holds Exchange Funds. According to IRS rules, a taxpayer in a 1031 exchange cannot receive or hold onto exchange funds realized from the sale of their relinquished property. Your qualified intermediary is responsible for receiving the sale proceeds of your relinquished property, holding it for you in an escrow account, and purchasing the replacement property on your behalf.
  5. Receives and hold written information about your potential replacement properties during the 45 days identification timeline.
  6. Acquires the replacement property or properties on your behalf and transfer the property title to you upon the closing of the replacement property.
  7. Submits a detailed accounting report of the 1031 exchange for the sellers’ record.
  8. Ensures compliance with all applicable 1031 exchange rules and regulations by acting as a guide to the taxpayer.

There are several roles a qualified intermediary may play to make a 1031 exchange process a success. It is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts.

To learn more about 1031 Exchanges and find out about our favorite qualified intermediaries, schedule your free 30-minute call today.

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