Let's talk about what a Qualified Intermediary does, and even what a Qualified Intermediary is. The Internal Revenue Code establishes the use of a Qualified Intermediary as a "Safe Harbor" for the performance of a tax-deferred exchange under the rules and regulations of Section 1031. What's a Safe Harbor? Essentially, it means that if an individual conducts his or her exchange within certain boundaries, the exchange cannot be challenged; it is within a safe harbor in that case.
SO WHAT'S A QUALIFIED INTERMEDIARY?
Certain entities can function as a Qualified Intermediary. It's easier to talk about who cannot be a QI than who can be. Your attorney cannot function as your QI if he or she has represented you within the previous two years; nor can your accountant. Same for your real estate agent. Anyone who has represented you in a professional capacity within the previous two years cannot function as your Qualified Intermediary in a Section 1031 tax-deferred exchange. Those people are disqualified; you need someone who is a disinterested third-party. You need a Qualified Intermediary.
What does a Qualified Intermediary actually do? First of all, a QI enters into a written agreement (the "Exchange Agreement") with the party who wishes to exchange property. Within that agreement, the parties agree that the QI will:
- Acquire the relinquished property (the property the exchanger wants to sell) from the exchanger;
- Transfer the relinquished property to the new Buyer;
- Hold the proceeds of the sale of the relinquished property in trust for the exchanger;
- Acquire the replacement property (the property the exchanger wishes to buy); and
- Transfer the replacement property to the exchanger.
The Exchange Agreement must expressly limit the exchanger's rights to receive, pledge, borrow, or otherwise obtain benefits of the funds held by the Qualified Intermediary. This is because the I.R.C. specifically states that the exchanger cannot have "actual or constructive receipt" of the proceeds of the sale of the relinquished property. This goes back to the safe harbor I mentioned earlier. Should the exchanger have control of the funds (whether actual control or constructive control), the exchange would be disallowed. For example, if the QI is the exchanger's accountant, it is the determination of the I.R.C. that constitutes constructive receipt of the funds.
Another important function of the QI is to assure the use and proper execution of the required documentation for an exchange. Having I's dotted and T's crossed is one of the more critical responsibilities of the Qualified Intermediary.
Time monitoring is another crucial task of the QI. There are dates before which certain things must be done to stay within the safe harbor afforded by the I.R.C. It is the responsibility of the QI to transmit that information to the exchanger and then to monitor the exchanger's progress as those dates approach.
In addition to the above list and descriptions of the QI's duties, the QI also does the following:
- Coordinates with each exchanger's attorney and/or tax adviser. Forward exchange documents as necessary to those advisers so that I.R.C. Section 1031 rules and regulations are clearly understood.
- Prepares the exchange documents needed for the transaction - the Exchange Agreement, the Assignment Agreement(s), the Notice of Assignment(s), the Qualified Exchange Account form, Instructions to the closing agents for the transaction(s), etc.
- Oversees each closing to confirm that procedures for a successful exchange are followed.
- Facilitates the sale of both the relinquished property and the purchase of the replacement property.
- Keeps and secures the proceeds of the sale of the relinquished property on behalf of the exchanger until funds are needed to purchase the replacement property. Some QI's do not pay interest on funds while held in trust; Iowa Equity Exchange pays an outstanding money market rate to the exchanger for each day that the funds are in our possession.
- Provides guidance, information, and critical timelines throughout the entire exchange process.
That gives you an idea of what a Qualified Intermediary does. The QI does not practice law or accounting, but must have a thorough knowledge of each as it applies to I.R.C. Section 1031 exchanges.
For more information about exchanges, please visit our web site at www.iowaequityexchange.com.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
INTEGRITY. PRECISION. SECURITY.
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