Playing In The Middle: The 1031 Exchange Intermediary
The Internal Revenue Service stipulates a number of requirements to be met if an investor is using Section 1031 of the code in a real estate transaction. Section 1031 is a tool to enable an investor in real estate to avoid paying taxes on any profit made from a sale of real property. It can be a valuable tool in achieving this goal as long as the guidelines stipulated in the code are strictly followed. There are numerous requirements, including intent on the behalf of the investor to trade properties, not to sell for profit. Hence, when an investor decides to use Section 1031 to make a deal, he must contract a person or firm generally referred to as a qualified intermediary. A 1031 exchange intermediary handles all of the required transactions; from money to paperwork, he basically propels the deal from beginning to end. A 1031 exchange intermediary offers his services for a fee and can be easily accessed through the internet. Qualified intermediaries are also referred to as accommodators, and are highly-trained professionals in the nuances of Section 1031 of the Internal Revenue Code, and greatly facilitate the process of gaining tax deferrals.
The qualified intermediary is a very important part of the exchange process. A 1031 exchange intermediary must not be someone personally connected to the investor; his includes family, friends or personal attorneys. He is required by law to be a disinterested third party during the transaction. Following the stipulations of Section 1031, he will arrange and take care of all paperwork involved in the transaction. The 1031 exchange intermediary will receive payment for the original property, and will disburse funds for the purchase of the replacement property. The investor must strictly adhere to the points expressed in Section 1031 in order to qualify for its benefits; most importantly, he must not take advantage of the time limitations set by the code. The 1031 exchange intermediary must be informed with 45 days of the properties the investor has chosen. These properties must meet the like-kind requirements of the Internal Revenue Code; they must be for commercial or investment use, and must have equal or higher value than the original property. After the investor’s decision, he has 180 days to complete the exchange, a deadline closely monitored by the 1031 exchange intermediary. The tax break will not be granted if more time is taken, and rarely does Section 1031 grant extensions or exceptions. Both the investor and the 1031 exchange intermediary are responsible for adhering to every deadline, policy and stipulation; failure to do so can result in tax fraud, and a lot of money lost on the behalf of the investor.
There is a lot of trust involved between an investor and a qualified intermediary; if the 1031 exchange intermediary does not do his job, or if the individual or firm files for bankruptcy, the investor can potentially lose his holdings, his properties and his innocence. Investors should research thoroughly before selecting a qualified intermediary to work on his exchange.
|
