Is a Qualified Intermediary Required For A 1031 Exchange?

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Are you aware of the fact that Qualified Intermediary (also known as 1031 Exchange Accommodator or 1031 Exchange Facilitator) is an essential part of a successful 1031 exchange process?

The thing you need to know when you think you have completed 1031 exchanges is to receive a tax bill. The veracity of the matter is that the Internal Revenue Code (IRS) has the power to abolish a 1031 exchange and charge you capital gain taxes on the sale if the disposition and acquisition transaction were not completed within the regulations implemented under 1031 exchange.

So how would you guarantee your capital gains taxes do not show up on your tax return after you have finished a 1031 exchange? So, the answer to this is Involve a reputed Qualified Intermediary (QI). The QI is the person who is responsible for completing the 1031 exchange and helps you to navigate the complicated 1031 exchange process and helps you to comply with each of the exchange code’s regulations and requirements.

Qualified Intermediary is the independent body that is not the investor, an agent of the investor, or a related party for the investor that enters into the written agreement with the investor to complete the 1031 exchange on behalf of the investor. The exchange cannot be completed without the involvement of the QI.

The Qualified Intermediary does the main work that is to restrict the investor access for the sale proceeds received after the sale of the relinquished property. The investor or the taxpayers are required to pay the taxes on any income received in any given year. But if the investor wants to defer the taxes on his income, the investor must defer receipt of income by avoiding both actual and the constructive receipt of that income.

As there are state and federal regulations implemented on QI therefore, it’s important to choose the QI carefully. Any agent can become QI with no licensing requirement but it should be taken care that they do not fall in one of the categories restricted from acting as QI, such as attorneys, accountants, and realtors who have served the taxpayer in their professional capacities within the prior two years, or any party or person related to the taxpayer. QI is the person who holds the proceeds of the sale on behalf of the investor and does not give any guarantee of security of the proceeds kept with him if he becomes bankrupt.

Different QIs involved in the process may make different decisions on how the funds are pooled and the way it is invested during the time in which the QI has possession. Different QI has different fee structures. Some QIs work on a flat rate and some work on interest basis earned on the funds during the period the funds are held.

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