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Can You Change Qualified Intermediaries During a 1031 Exchange?
The Role of the Qualified Intermediary in a 1031 Exchange
By definition, a Qualified Intermediary (QI) is an independent third-party that facilitates IRS Section 1031 tax-deferred exchanges. The primary function of a QI is to serve as a conduit in the exchange, managing the acquisition and transfer of properties while ensuring compliance with the detailed rules established by IRS Regulations. This oversight is crucial for maintaining the integrity of the exchange to achieve tax deferral. Additionally, it is essential that the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger avoids actual or constructive receipt of the proceeds from the sale of the Relinquished Property during the period between the sale and the purchase of the Replacement Property(ies). The Regulations suggest several methods to ensure that the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger is not deemed to have access to those funds. Typically, this requirement is met by having the QI hold the funds on behalf of the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger .
How the Qualified Intermediary Facilitates the 1031 Exchange
The regulation clearly states that the Qualified Intermediary "acquires the Relinquished Property from the taxpayer, transfers the Relinquished Property [to the The purchaser of the taxpayer's relinquished property. Buyer ], acquires the Replacement Property, and transfers the Replacement Property to the taxpayer." This is accomplished using assignments, legal documents that the QI prepares as part of the exchange.
In these assignments, the Exchanger assigns their rights, but not their responsibilities, under the contracts for both the sale of the Relinquished Property and the purchase of the Replacement Property(ies). The QI then arranges the transfer of the Relinquished Property to the The purchaser of the taxpayer's relinquished property. Buyer and handle the receipt of the Replacement Property(ies) from the Seller, ensuring the properties are exchanged.
Although the deeds to the properties never physically pass through the Qualified Intermediary and the QI never holds legal title, the assignments create a legal framework that makes it appear as though this transfer occurs. Essentially, the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger is transferring the Relinquished Property to the QI and receiving the Replacement Property(ies) from the QI. This is where the actual exchange takes place, within the legal framework of the two assignments.
Why Exchangers Want to Change Qualified Intermediaries
Periodically, we receive inquiries from Exchangers who have already sold their Relinquished Property and are in the middle of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange but are seeking to change their Qualified Intermediary. There are several reasons why an Exchanger might consider this change. Sometimes, it's due to a lack of responsiveness from their current Qualified Intermediary, with unanswered calls and emails causing frustration. In other cases, the Exchanger may feel that the QI does not demonstrate the level of competence required to inspire confidence that their exchange is being managed properly.
Why Exchangers Can’t Change Qualified Intermediaries Mid-Exchange
Unfortunately, once a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange is underway, an Exchanger cannot switch Qualified Intermediaries. This is because the QI must be involved in both the sale of the Relinquished Property and the purchase of the Replacement Property(ies) as noted in the above section. Swapping intermediaries partway through would invalidate the exchange, according to IRS Regulation §1.1031(k)-1(g)(4)(iii). Thus, the same QI must handle both transactions to maintain compliance.
According to Regulation §1.1031(k)-1(g)(4)(iii), a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary must:
Not be the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger or a disqualified person (as defined in paragraph (k) of the regulation).
Enter into a written agreement with the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger (known as the "exchange agreement"). As part of this agreement, the QI is required to acquire and transfer the Relinquished Property, as well as acquire and transfer the Replacement Property(ies) to the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger .
There is one circumstance under which an (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger may change Qualified Intermediaries, but it is very narrow. If the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger has begun working with a Qualified Intermediary, and even gone so far as to sign exchange documents, but the first real estate transaction that is part of the exchange has not been consummated, the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger can change QIs without problem. More succinctly, if the first sale or purchase that is part of the exchange has not yet closed escrow, the exchange has not technically begun, and the Exchange may change to a more suitable QI.
The Importance of Expertise in Complex 1031 Exchanges
Not all Qualified Intermediaries are equally skilled or experienced and given the inability to change QIs mid-exchange it is crucial to choose a “qualified” QI from the start. Some QIs focus solely on handling simple forward delayed exchanges, which are the most basic type of Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange . However, Exchangers may sometimes realize mid-process that they need a more advanced exchange that also requires an Exchange Accommodation Titleholder (EAT), such as a forward improvement exchange, which is beyond the expertise of many QIs. At this point, they would be stuck without the option to change QIs and if full tax deferral relied on their ability to do a forward improvement exchange, they would be facing a potentially taxable event.
Whether an Exchanger is planning for a simple or complex Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , it is always encouraged that they choose a Qualified Intermediary well versed in all types and complexities to fully ensure tax deferral. It is essential to select a Qualified Intermediary before the first closing of a Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange , as switching mid-process is not allowed. Not all QIs have the expertise to manage complex exchanges, so consult your tax and legal advisors early on. Choosing an experienced QI, such as Accruit, ensures that your Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment." 1031 Exchange is managed efficiently and in full compliance with IRS regulations.
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.
