A 1031 exchange is a business tax strategy that is used when investors are selling and purchasing real estate. The exchange allows the investor to sell the initial property and not pay taxes on the sale of it, as long as they use the proceeds of the sale to purchase another investment property. This allows investors to defer taxes and increase wealth by investing in another property. If you are an investor seeking to sell a property and reinvest the earnings from the sale in another property, then a 1031 exchange would be wise to evade taxes on the sale. Hiring a good team of professionals to aid in the exchange process would also be wise, as the IRS has strict, and sometimes complicated, guidelines on how the exchange must occur. One of these qualified professionals that is often required in a 1031 exchange is an intermediary, who is in charge of all transfers of properties between the buyer and seller of both initial property and replacement property.
How A Qualified Intermediary Facilitates The Exchange
A qualified intermediary (QI), or Exchange Accommodator or Facilitator, is crucial to the 1031 exchange process. One cannot simply sell their property to another person and purchase another expecting taxes to be deferred. Under most circumstances, the IRS rules make it so that the exchange cannot successfully be done resulting in a tax deferral without a middle person to facilitate the exchange. This middle person is normally an intermediary, who is responsible for facilitating all parts of the exchange. So, what qualifies an intermediary? An intermediary cannot be the taxpayer wishing to exchange properties and defer taxes, nor can it be any immediate family members of the taxpayer. The intermediary is also required to be qualified by IRS law. Once the investor (or taxpayer) chooses a qualified intermediary, the intermediary enters a written agreement with the investor, stating that they will facilitate the exchange. The exchange transaction is then given to the investor’s attorney to ensure that all agreements are understood by all parties. By facilitating the exchange, the qualified intermediary is agreeing to acquire the initial property from the investor that he or she wishes to sell. Then, the intermediary transfers the property to the buyer of the initial property. The replacement property is then acquired by the intermediary from the seller, and is finally transferred to the investor. Having an agreement for exchange strictly limits the investor from obtaining any money or property from the intermediary during the process. Intermediaries are also beneficial for providing all parties involved in the exchange with guidance, pertinent information, and deadlines that must be met to fulfill the 1031 exchange.
Choosing a 1031 Exchange Intermediary
Choosing a qualified intermediary or real estate lawyer in Allentown, PA, like from Hoegen & Associates, P.C., is essential for a successful 1031 exchange. Exchanges can get complicated, and choosing the right one for your circumstances may greatly reduce the chances of things going awry somewhere down the line. Intermediaries are not regulated, so choosing one that is truly qualified for the job may be difficult. Be sure to do research and get second opinions on intermediaries before fully committing to one.