The Internal Revenue Service will disqualify a 1031 exchange, recharacterize it as a taxable sale, and subsequently assess the depreciation recapture and capital gain income tax liabilities if you have the ability (right) to access, control or receive, or could have received, the sale proceeds after the disposition (sales) of your relinquished property (constructive receipt and/or actual receipt).
Section 1.1031 of the Department of the Treasury Regulations specifically requires the use of a Qualified Intermediary, also known as a 1031 Exchange Accommodator or 1031 Exchange Facilitator in the real estate industry. As the Qualified Intermediary, Exeter 1031 Exchange Services, LLC will be assigned in to the transaction on behalf of the Investor as the seller or buyer, depending on which side of the transaction you are on, and hold the net sales proceeds from the sale of the relinquished property until the like-kind replacement property transaction is ready to close. The Department of the Treasury Regulations contain certain safe harbor provisions that avoid the constructive or actual receipt issues when the Investor has retained and used a Qualified Intermediary or 1031 Exchange Accommodator.
The Qualified Intermediary must be an independent entity who is not the Investor, an agent of the Investor, or a related party to the Investor and who enters into a written Like-Kind Exchange Agreement, Qualified Escrow Account Agreement and the Assignment, Acceptance, Notice and Direction to Convey documents. These tax-deferred like-kind exchange agreements must limit and restrict the Investors's rights to the 1031 exchange funds from the sale of the relinquished property. It directs the Qualified Intermediary to acquire the relinquished property from the Investor, transfer it directly to the buyer, acquire the like-kind replacement property from its seller and transfer it directly to the Investor.
You should also read Choosing a SAFE Qualified Intermediary (Accommodator).
If you have any questions relating to 1031 exchanges or the qualified use requirement, please contact me at:
EXETER 1031 EXCHANGE SERVICES, LLC
Steven W. Monk
Vice President and Regional Manager
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