1031 Exchange FAQ - 02

A Qualified Intermediary is a person (or company) who, for a fee, acts to facilitate the 1031 exchange by entering into an agreement with you for the exchange of properties.

An intermediary is treated as acquiring and transferring property if:

The intermediary acquires and transfers legal title to that property.
The intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with a person other than the exchanger for the transfer of the Relinquished Property to that person. Under the agreement, the intermediary transfers the Relinquished Property to that person.
The intermediary (either on its own behalf or as the agent of any party to the transaction) enters into an agreement with the owner of the Replacement Property for the transfer of that property. Under the agreement, the intermediary transfers the Replacement Property to the exchanger. Solely for these purposes, the 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 that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property.

The exchanger or a disqualified person cannot qualify as qualified intermediaries for their own exchange. A person or company is NOT a Qualified Intermediary IF:

The person is an agent of the exchanger at the time of the transaction.
The person and the exchanger bear a relationship described in Section 267(b) or Section 707(b). However, you must substitute “10 percent” for “50 percent” each time it appears in those Sections.
The person and a person who is an agent of the Exchanger at the time of the transaction bear a relationship described in (2) above.

These people are treated as agents of the exchanger: A person who has acted as the exchanger’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties. However, the regulation disregards certain services for purposes of determining if an agency relationship exists. Performance of services with respect to exchanges of real estate intended to qualify under §1031 is not taken into account.

Furthermore, performance of routine financial, title insurance, escrow, trust services by a financial institution, title insurance company, or escrow company is not taken into account.

Here are some examples to illustrate the disqualified person definition. In all examples, Exchanger enters into an exchange agreement with Jones to retain Jones to facilitate an exchange of real property Happy Acres.

Jones is Exchanger’s accountant and has rendered accounting services other than with respect to §1031 exchanges of property to Exchanger within the 2-year period ending on May 17, 1991. Jones is a disqualified person. If Jones had not acted as Exchanger’s accountant within the 2-year period ending May 17, 1991 or if Jones had acted as Exchanger’s accountant within that period only with respect to Section 1031 exchanges, Jones would not be a disqualified person.

Jones is engaged in the business of acting as an intermediary to facilitate deferred exchanges. Jones is a wholly owned subsidiary of an escrow company that has performed routine escrow services for Exchanger in the past. Jones has previously been retained by Exchanger to act as an intermediary in prior §1031 exchanges. Jones is not a disqualified person notwithstanding the intermediary services previously provided by Jones to Exchanger and notwithstanding the combination of Jones’s relationship to the escrow company and the escrow services previously provided by the escrow company to Exchanger.

Jones, Inc. is a corporation only engaged in the business of acting as an intermediary to facilitate deferred exchanges. Each of 10 law firms own 10 percent of the outstanding stock of Jones, Inc. One of the 10 law firms that own 10 percent of Jones, Inc. is Mason and Mason. Eileen is the managing partner of Mason and Mason and is the president of Jones, Inc. Eileen, in her capacity as a partner in Mason and Mason, has also rendered legal advice to Exchanger within the 2-year period ending on May 17, 1991, on matters other than §1031 exchanges.

Eileen and Mason and Mason are disqualified persons. Jones, Inc., however, is not a disqualified person because neither Eileen or Mason and Mason own, directly or indirectly, more than 10 percent of the stock of Jones, Inc. Eileen’s participation in the management of Jones, Inc. does not make her a disqualified person.

Here’s a transaction where everything went wrong. It’s an excellent example of why an exchanger should retain the services of a good Qualified Intermediary and tax advisor before entering into a §1031 exchange. Especially one involving related taxpayers.

In FSA (Field Service Advice) 200048021, the IRS said a father who sold his property to his children couldn’t qualify for nonrecognition of gain under §1031(a) on the exchange of his property for an interest in another property.

Here’s what happened—the father wanted to sell his property to his four children. They drew up an exchange agreement for a like-kind exchange, but failed to identify the property being exchanged. The father then deeded the property to the children, and the children executed a promissory note designating their father as the lender and another individual as the escrow agent. The children did not own any replacement property, so the father located it for them. Only then did the father then contacted a Qualified Intermediary for the exchange.

In the meantime however, the father actually received the deed to the property directly from the owner. The children later sold small portions of the property they received from their father to unrelated third parties. The IRS said the father was not entitled to the benefits of §1031.

First, the escrow agent didn't satisfy the definition of a Qualified Intermediary. Second, the father failed to unambiguously identify the replacement property. Third, the father was in constructive receipt of the proceeds from the sale of his relinquished property before receiving his replacement property. This violated the constructive receipt rules since the father never did use the safe harbor rules available from a Qualified Intermediary.

The IRS said the father's transfer to his children did not even qualify as a §1031 exchange at all, even as an exchange between related persons because the father did not exchange property with his children, but rather sold property to them.

Related Info: , jones, person, exchanger, father, agreement, mason

A Starker Exchange IS a 1031 Exchange. The term Starker comes from a lawsuit case in 1979, Starker vs. U.S. (602 F.2d 1341), that a contract to exchange a property in the future is the same as a simultaneous exchange. It is this case where the delayed 1031 Exchange originated. In order to get 1031 Exchange treatment from the IRS, you need to identify the property as a 1031 Exchange before closing, identify the replacement property with 45 days of closing and acquire your replacement properties with 180 days of closing and you MUST use a Qualified Intermediary to facilitate your transaction.

Related Info: starker, closing, case, replacement, identify, treatment

The Who, What, Where, When, Why and How of a 1031 Exchange can be found here!

1031 Exchange - Who?
1031 Exchange - What?
1031 Exchange - Where?
1031 Exchange - When?
1031 Exchange - Why?
1031 Exchange - How?

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