Define: Qualified Intermediary

A Qualified Intermediary is a third-party entity that facilitates tax-deferred exchanges under Section 1031 of the Internal Revenue Code. They hold the proceeds from the sale of a property and use it to acquire a replacement property, allowing the taxpayer to defer capital gains taxes.

The IRS requires the use of a Qualified Intermediary to ensure that the taxpayer does not have actual or constructive receipt of the funds from the sale of the relinquished property. This is crucial for maintaining the tax-deferred status of the exchange.

It is important to select a Qualified Intermediary who is experienced, knowledgeable, and has a good reputation. Look for a QI who is properly licensed, insured, and has a track record of successfully handling 1031 exchanges.

A Qualified Intermediary is responsible for preparing the necessary exchange documents, holding the funds in a segregated account, coordinating with the closing agents, and ensuring compliance with IRS regulations throughout the exchange process.

No, the IRS prohibits taxpayers from acting as their own Qualified Intermediary. This is to prevent any potential conflicts of interest or the taxpayer having control over the funds during the exchange.

The fees charged by Qualified Intermediaries can vary, but they typically range from 1% to 2% of the exchange amount. It is important to discuss the fees upfront and understand the services included in the fee structure.

To mitigate this risk, it is crucial to choose a Qualified Intermediary who has appropriate safeguards in place, such as fidelity bond coverage or escrow accounts. Additionally, it is advisable to consult with legal counsel and consider obtaining a guarantee or indemnification from the QI.

Yes, you can use the same Qualified Intermediary for multiple exchanges. However, it is important to ensure that the QI has the capacity to handle multiple transactions simultaneously and that they have the necessary resources to meet your specific needs.

Yes, there are strict time limits that must be followed. The taxpayer has 45 days from the sale of the relinquished property to identify potential replacement properties and 180 days to complete the exchange. Failure to meet these deadlines may result in the disqualification of the exchange.

Yes, a Qualified Intermediary can also facilitate reverse exchanges, where the replacement property is acquired before the sale of the relinquished property. Reverse exchanges have additional complexities, so it is important to work closely with a knowledgeable QI and tax advisor to ensure compliance with IRS regulations.