1031 Exchange FAQ - QUALIFIED INTERMEDIARY

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Do I need to find a local 1031 Exchange Qualified Intermediary?

Some people who are getting ready to close on their 1031 Exchange property think they need to work with a local Qualified Intermediary in their city or state. This is not true. The IRS Section 1031 Exchange is a federal action. This means you should be able to work with the Qualified Intermediary of your choice from any location in the US. You recommend you choose a QI that you can trust. Realty Exchangers, Inc is a Qualified Intermediary with a 20-year reputation of providing fast and easy 1031 Exchanges to taxpayers in all 50 states and the Virgin Islands. Our credentials are impeccable, the security of our funds is the best available and our 1031 Exchange knowledge is the most comprehensive.

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When my qualified Intermediary holds my funds, how safe are they?

Given todays economic climate, we can think of no better question to ask. You should know that as your 1031 Exchange Qualified Intermediary, Realty Exchangers takes the safety and security of your funds very seriously.

For over 20 years now the safety of client proceeds has been of prime importance to us and here's what we've done about it.

The two most important areas of concern are:

1. The Bank where client funds are deposited.
2. The Qualified Intermediary.

1.) The Bank: Although our bank is considered strong and very well capitalized the only real safety for bank accounts today is "FDIC" (Federal Deposit Insurance Corporation) insurance. Our bank, Riverview Community Bank of Vancouver Washington, has qualified for the FDIC's Transaction Account Guarantee Program and ALL OF REALTY EXCHANGERS ACCOUNTS ARE "FDIC" INSURED. Unlike previous "FDIC" insurance there is no upper limit on the amount.

2.) The Qualified Intermediary: Our company is Licensed, Insured, and Bonded but the only real protection is a QUALIFIED ESCROW AGREEMENT. This is a separate signed agreement between you, us, and the bank, which requires you to approve in writing any withdrawal of your 1031 funds. At the same time it keeps control of the 1031 funds with Realty Exchangers, Inc. thereby meeting the IRS's §1031 requirements (see note below). Unless otherwise requested ALL EXCHANGE ACCOUNTS WILL NOW INCLUDE A QUALIFIED ESCROW AGREEMENT.

Note: The Qualified Escrow Agreement is signed by all parties at the time of closing of the relinquished property. When the 1031 funds are wired into Realty Exchangers account the bank places a hold on the account. Then when the exchanger is ready to close on the replacement property a form is signed by the exchanger (you) that authorizes the bank to release the specified amount to that escrow as requested by Realty Exchangers wiring instructions. Quite simply, the exchanger will have to authorize any use of their 1031 funds.

We want you to feel secure and able to devote your full attention to the structure and completion of your 1031 exchange knowing that your funds will be there when you need them.

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Why does the Qualified Intermediary have to hold the proceeds from my 1031 Exchange? Why can't my Title Escrow Company?

The biggest issue here is to avoid "constructive receipt" of your proceeds, which is why you should NOT keep money or other property during the transaction. If you receive the entire cash proceeds from your 1031 Exchange or are in control of those funds in any way, you will not qualify for §1031 treatment.  You must overcome the doctrine of " constructive" receipt. The general rules concerning actual and constructive receipt apply to determine if you are in actual or constructive receipt of money or other property before you actually receive like-kind Replacement Property.
You are in actual receipt of money or property at the time you actually receive the money or property. You are also treated as being in receipt if you receive the economic benefit of the money or property. You are in constructive receipt of money or property at the time the money or property is credited to your account, set apart for you, or otherwise made available to you so you may draw upon it at any time. Or if you can draw upon it if notice of intention to withdraw is given. In addition, actual or constructive receipt of money or property by your agent is actual or constructive receipt by you.

The 1031 exchange Regulation provides a "safe harbor" that permits you to sell your Relinquished Property and acquire Replacement Property and avoid constructive receipt. This safe harbor is your written contractual agreement with a Qualified Intermediary.

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What is a 1031 Exchange Qualified Intermediary?

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.

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Can my Title Company force me to use their 1031 Exchange Qualified Intermediary?

Absolutely not! Your 1031 exchange Qualified Intermediary is completely YOUR CHOICE!

In fact, the safe harbors of IRS Section 1031 Exchange specifically permit the Qualified Intermediary to be your agent, answerable only to you—absolutely no one else. Real or perceived. We also suggest that you you be careful of “steering.” Steering is the act by real estate agents and others referring business to friends or related parties. In our opinion, your QI should have no relationship or business connections to other parties you are dealing with in your deferred exchange transaction.

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While my 1031 Exchange is being held by a Qualified Intermediary, can I keep the interest?

Yes. This is an arrangement that you will have to make with your Qualified Intermediary. You may interest on proceeds being held in the deferred exchange. You are entitled to receive interest or a growth factor if the amount of money or property you are entitled to receive depends upon the length of time elapsed between transfer of the Relinquished Property and receipt of the Replacement Property.

If you receive interest or a growth factor, the interest or growth factor will be treated as interest, regardless of whether it is paid to you in cash or in property (including property of like-kind). You must report the interest or growth factor in your income according to your method of accounting.

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Can a Realtor be a 1031 Exchange Qualified Intermediary?

Yes and no. There are no laws preventing anyone from becoming a 1031 Exchange Qualified Intermediary. If a Realtor wants to become a QI, there is nothing prohibiting this from happening. However, it should be noted that it goes against the Safe Harbor laws for a Realtor to act as 1031 Exchange Qualified Intermediary for a transaction that they are directly involved in, either as owner of the property in question or as a representative of an owner of property involved in a 1031 Exchange. The biggest issue here is avoiding Constructive Receipt of the proceeds. Any party involved in a 1031 Exchange must not have direct access to their 1031 Exchange proceeds.

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In a 1031 Exchange, are there any other closing costs other than the fee to the Qualified Intermediary?

When you sell your 1031 Exchange property it is no different that any other sale. When you sell any property, there are laws and rules to be followed in your city, county and state which must be followed. These include Title insurance, Warranty deeds, Closing company fees, Realtor's fees and all of the other fees associated with lawfully selling real estate. The Fees you would pay your Qualified Intermediary are a small  part of these fees. Typically, they are listed in the HUD Settlement statement and are paid by the closing company.

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Do I need to engage a Qualified Intermediary right away?

If you think you are going to execute a 1031 Exchange, it is better to engage a Qualified Intermediary as soon as possible. Waiting until the last minute can only complicate a process that should be very uncomplicated. Let's say you have a qualified property that you want to exchange. The best time to contact your Qualified Intermediary is right after you've written a Purchase and Sale Agreement with your attorney and the buyer and at the same time you contact a closing company to handle the sale of the property. Your Qualified Intermediary will contact your closing company and can provide them with the documents they need to convert you sale into a 1031 Exchange. Some QI's can turn out documents same day but with careful planning we can the rush which can cause mistakes. When it comes to 1031 Exchange, the fewer mistakes that are made with the paper work, the better!

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My Realtor told me I should avoid using a Qualified Intermediary for my 1031 Exchange. Please Explain?

Interesting, though not surprising. There are a number of professionals, including some mis-informed Realtors, in the Real Estate industry who fail to understand how a 1031 Exchange works or how easy they are to execute. True recent news does include reports of Qualified Intermediaries with unsafe funding practices, but most QI's are solid companies with impeccable reputations. Your question leads to explaining why a Qualified Intermediary is necessary? A Qualified Intermediary is a necessary function of the 1031 Exchange because using one prevents you from being in Constructive Receipt of your proceeds. The IRS has said that at no time during the 1031 Exchange period may you have direct access to your sales proceeds. This measure is mean to insure that ALL of the funds are spend on the 1031 Exchange at not used for other purposes. Also, it should be understood that any funds removed from the sales proceeds are 100% taxable as Capital Gains and due during the same year of the sale.

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Can my brother be the Qualified Intermediary in my 1031 Exchange?

Your brother is considered an "agent of the exchanger" and cannot qualify as a Qualified Intermediary for your 1031 Exchange.

A person is a disqualified person 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.

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How do I find a 1031 Exchange qualified intermediary in New Jersey?

Taxpayers often then that they need to find a local Qualified Intermediary located in their own city or state. This is far from true. 1031 Exchange is a federal IRS action taken by tax payers to delay the Capital Gains tax owned on the sale of their investment or business property. You may 1031 Exchange with any Qualified Intermediary in all 50 states, including the US Virgin Islands. Realty Exchangers performs 1031 Exchange in New Jersey, you can contact them at 800-570-1031. Realty Exchangers also does 1031 Exchange in the following states, Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.

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Can I do a 1031 Exchange without a Qualified Intermediary?

The rules for Safe Harbor make it VERY difficult to accomplish a 1031 Exchange without a Qualified Intermediary. The Safe Harbor provisions were added to the 1031 exchange rules to protect you from Constructive Receipt of your 1031 Exchange proceeds, which are intended solely to be re-invested in your 1031 Exchange Replacement Property. While it is possible to establish a 3rd party escrow account which has some Safe Harbor protection you are still going to have a difficult time convincing the IRS that you never had control over the money. When you hire a Qualified Intermediary, this is never an issue and it becomes money well spent.

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Are 1031 Exchange Qualified Intermediary Escrow Accounts safe?

The Safe Harbors required to conduct a 1031 Exchange insist that your 1031 Exchange proceeds are stored in an escrow account held by your Qualified Intermediary. It should be understood that not all QI accounts are created equal. Insist that your Qualified Intermediary pay to have every penny of your 1031 Exchange proceeds FDIC insured. Many banks only offer FDIC insurance for funds up to $250,000. Few banks over this coverage on amounts higher than $250k. Another safety measure is to request that your QI establish a Qualified Escrow Account with your money, which mean that no funds are accessed without your knowledge and consent signature. As your Qualified Intermediary Realty Exchangers takes the safety of your money seriously. Review our safety protocols by clicking here.

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Can a 1031 Exchange Qualified Intermediary make Earnest Money or Down Payments?

This is really not a good idea. The purpose of the 1031 Exchange proceeds that your Qualified Intermediary holds for you is to continue your investment in a new property. The problem with the QI making deposits or down payments is that there is no security that you will complete the sale. This poses lots of questions. What if? What if your funds are deposited and a flood damages the property? What if the seller changes his mind or and skips town with your money. Because the funds were spent on a property that you didn't buy, you are in danger of collapsing your exchange. This is why the proceeds MUST be spent at the time of purchase for the replacement property and for no other purpose. If a deposit or down payment is needed, we recommend that you use your own personal funds and then get them back at the time of closing.

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I read that I can do a 1031 Exchange without a Qualified Intermediary. Is that possible?

Well, good luck. There are many articles on-line from self-professed 1031 Exchange GURUs who proclaim that you can 1031 Exchange properties without the help of a 1031 Exchange Qualified Intermediary. We ask with so much that can go wrong, is it really worth the risk? If you 1031 Exchange fails, you will be subject to the capital gains tax. The purpose of the Safe Harbor is to prevent Constructive Receipt of your 1031 Exchange proceeds. Your 1031 Exchange Qualified Intermediary IS the preferred method of Safe Harbor.

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Why can't a 1031 Exchange Qualified Intermediary pay the Exchanger directly?

A very good question. Thank you. One of the most important aspects of the IRS 1031 Exchange is avoiding Constructive Receipt.  The IRS signifies that in order to reap the benefits of a 1031 Exchange you must not be in direct control of the 1031 Exchange proceeds at any time during the 1031 Exchange period. This period begins at the closing of sale of your Relinquished Property and the closing of sale of the final Identified Replacement Property. You cannot prove that your funds were in a Safe Harbor if you have direct access to the money during this time. If the IRS sees that the QI paid you directly, you 1031 Exchange will collapse and your exchange instantly convert into a sale. At the point, your sale is subject to the Capital Gains Tax. If you goal is to enjoy the Capital Gains Deferment of a 1031 Exchange, DO NOT TOUCH THE MONEY! Leave the Safe Harbor in place and let your 1031 Exchange proceed!

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Do you have to have a Qualified Intermediary for a 1031 Exchange?

One of the rules of 1031 Exchange is the necessity of Safe Harbor. Safe Harbor is the storing of your 1031 Exchange proceeds with protections from Constructive Receipt. If you are in direct control of your proceeds at any time during your 1031 Exchange period, you are in danger collapsing your 1031 Exchange and having to pay the capital gains tax on your sale in the same year, rather than defer the gains to some future date.  More information about Safe Harbors and why you need them for your 1031 Exchange can be found in our 1031 Exchange Knowledge base.

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After we close on my relinquished property, how soon can I access my proceeds.

Answer: As you qualified intermediary, we are holding your proceeds for one specific purpose, so that you can purchase a replacement property and complete your 1031 Exchange. We can give you proceeds back anytime you wish and for whatever purpose, but if the goal is  1031 Exchange, there are some IRS rules to follow.

1. You can take back proceeds, called "boot receivable" at the time your Relinquished Property closes. These funds are subject to Capital Gains and are deducted from your proceeds BEFORE they are transferred to your Qualified Intermediary.

2. Soon as you Identify your properties (within 45 days of the sale of your relinquished property), you have 180 days to close sale on them. The IRS states that you cannot access any of your proceeds until ALL of your identified properties have closed sale.

Any access to your proceeds during the 180 day period prior to closing on your identified replacement properties could negate your entire 1031 exchange, which means your entire proceeds could be subject to the Capital Gains Tax.

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Frequently Asked 1031 Exchange Question

Question:  After we close on my relinquished property, how soon can I access my proceeds.

Answer: As you qualified intermediary, we are holding your proceeds for one specific purpose, so that you can purchase a replacement property and complete your 1031 Exchange. We can give you proceeds back anytime you wish and for whatever purpose, but if the goal is  1031 Exchange, there are some IRS rules to follow.

1. You can take back proceeds, called "boot receivable" at the time your Relinquished Property closes. These funds are subject to Capital Gains and are deducted from your proceeds BEFORE they are transferred to your Qualified Intermediary.

2. Soon as you Identify your properties (within 45 days of the sale of your relinquished property), you have 180 days to close sale on them. The IRS states that you cannot access any of your proceeds until ALL of your identified properties have closed sale.

Any access to your proceeds during the 180 day period prior to closing on your identified replacement properties could negat

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