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What a good intermediary does in a 1031 exchange

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A 1031 exchange isn’t a do-it-yourself project. Apart from the usual participants to the transaction (you, the seller, and the owner with whom you will be swapping properties), you will have to tap the services of a qualified intermediary (QI), also known as exchange accommodators or facilitators.

What is a qualified intermediary?

A qualified intermediary in a 1031 exchange is a person with some degree of disinterest or distance from yourself. This means your intermediary cannot be a family member, your own attorney, or your agent. The bottom line is that you cannot engage a person or firm with whom you have financial stakes to become your intermediary here.

The QI must be able to work well with other vested parties in the transaction. They are not your personal advocate but a facilitator of the purchase and sale of the ensuing asset transfer. The intermediary should ascertain that the entire deal is legal and that requisite taxes are correctly and duly paid.

The capital gains taxis primarily what the QI looks at to determine if there are any profits to achieve after a property sale. But should there be a deferment of taxes due to the implementation of a like-kind exchange, the QI sees to it that deadlines are met and that legal documents and financial investments are in order for success in the transaction.

1031 exchanges do not apply to premium properties like personal residences and vacation homes, as well as property being developed or purchased with the intent of reselling. What is included, however, are properties like single-family rentals, vacant lots intended for commercial use, and offices or retail stores in strip malls. It is your intermediary’s responsibility to help you determine whether your property qualifies for the 1031 exchange or not.

What does the intermediary do?

Apart from coordinating with pertinent parties on the structure of the exchange, the main responsibilities of a good intermediary in a 1031 exchange real estate transaction include preparing all the documentation required for the assets to be traded and furnishing the escrow company with the necessary documentation.

The intermediary opens the transaction between parties and effects the actual transfer of the assets to their new owners. Your QI sells your property on your behalf, purchases the property you are exchanging your property for, and then takes care of transferring the deed to your name, all within the legal guidelines of the IRS.

Capital gains taxes are deferred in a successful 1031 deal. This transaction has to be completed within a 45-day time period to avoid having the swap disqualified as a tax-deferred exchange, thereby incurring the usual taxes. Upon completing this transaction, the QI provides all parties and the IRS with a complete report of the transactions, as well as any other relevant documentation that may be required.

Why is a good intermediary important?

Finding the real estate for swapping with your own property can be difficult. However, IRS Section 1031 allows intermediaries to facilitate exchanges and avoid difficulties in locating these direct swaps so that both parties get what they want.

A real estate agent with knowledge of the nuances of the 1031 exchange will be able to recommend reliable QIs from their network of colleagues in the industry. You can also check referrals of financial advisers, accountants, lawyers, and even other escrow agencies in your area. They will most likely recommend one with an illustrious track record of successful 1031 transactions. You will be assured that this QI will keep you updated on fees and schedules so that you can accomplish the property swap with no hitches.

Also remember that reliability and trust are vital characteristics of the person or agency to whom you are entrusting your assets in managing a high-value transaction like a 1031 exchange. Be in the know of news regarding an intermediary you’re considering for the job. Many others have fallen victim to intermediaries who realigned funds entrusted to them without the knowledge of their clients. This is why background research is very important in this endeavor.

It is also a good idea to find out the stature of a potential intermediary in the industry. A thought leader or a renowned expert who is often sought out to give training and advice to others in the field is usually a worthwhile gamble when choosing someone to transact your 1031 exchange with the best outcome.

Ready to sell your property? Let The R&Z Group of Marcus & Millichap assist you.You can reach our team here. You can also contact us at 650.391.1758 and 650.391.1781.

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