A successful 1031 exchange isn’t a do-it-yourself project. You must follow IRS rules to realize the tax deferral benefits and you’ll need a middle person, called a qualified intermediary (QI). David Moore walks through the steps of facilitating a 1031 exchange.
There are a lot of moving parts to a 1031 exchange and a lot of questions that investors can have about them. Here’s some of the most commonly asked questions about qualified intermediaries, and make sure to check out the full video for more details!
A QI is an unrelated party who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the exchangor’s relinquished property and the acquisition of the exchangor’s replacement property per the exchange agreement.
The Qualified Intermediary has NO economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code. A “Qualified Intermediary” is the correct technical reference according to Treasury Regulations, but the Qualified Intermediary can also known as the Accommodator, Facilitator or Intermediary while working in exchange services.
As early as possible. As early as when you first purchase the property but at the very least when you choose to sell it. Being involved at the purchase time of the property allows a QI to aid in structuring the ownership in a manner that allows you to get out the way you want when you want to. Involve a QI before going through the stages of the sale in order to avoid reaching the state of the sale in which a 1031 exchange is no longer an option for the property.
It’s important to understand how a qualified intermediary is involved in your 1031 exchange. Watch the video or read the full transcript below to get the full details on what a qualified intermediary does for your investing.
David Moore: Hello, David Moore with Equity Advantage, 1031exchange.com. And today’s topic is how does a QI structure and exchange? A QI is a Qualified Intermediary. Actually, we’ll just look at that for a second. What do you call an exchange company? They’re called QIs, Qualified Intermediaries. They could be called accommodator, and exchange accommodator, exchange facilitator, years and years ago called a straw man… That obviously has fallen out of favor.
We like to call Equity Advantage a facilitation company because we feel it’s an active role. We’re going to actually help you get where you need to go. It’s not about accommodating a transaction. We’re going to actually take an active role, look at it, and help you get where you want to go. Or maybe it’s a situation where you don’t even need to do an exchange. In this situation, we’re going to tell you that.
David Moore: So, I always say it. Only dumb question is one that you don’t ask. Give us a call if you’ve got questions, and we’re happy to address those questions. But if you look at a QI, and you look at what we do in a transaction, we’re actually just an independent, third party, paid a fee to structure an exchange. So if you look at the most basic concept of an exchange, you’ve got something, I’ve got something, and we swap back and forth, that can happen really as something that’s mutually beneficial, and that’s where the exchange industry grows.
So what the exchange company does is steps in the middle of the transaction. And you’re going to list your property as you normally would, negotiate a sale as you normally would. You’re going to include a cooperation provision in that purchase sale agreement, and that cooperation provision is going to establish your intent to do the exchange, and it opens the door for us to get involved with the transaction.
David Moore: Now, a word of caution. A lot of states these days, in their residential and commercial forms, will have a boiler plate contingency in there stating that the buyer or seller has the right or the option to do an exchange, which is great because it doesn’t establish intent, but it gives you the ability to do it. So it keeps that door open. The downside of just relying on that statement is it’s not telling anybody that you’re doing an exchange.
So how’s escrow supposed to know you want to do an exchange unless somebody tells them that? And from my experience, if you’re closing a deal in New York or were working with that closing attorney, or were working with an escrow company on the west coast, they have a tendency to be upset if they’ve drawn up everything as that basic sale, and then you come back later and tell them, “Hey, it’s an exchange,” and now they’ve got to redraft everything.
David Moore: So, do yourself a favor. Do everyone a favor. If it’s an exchange, make sure that the people working with you know that you want to do an exchange, and therefore you’re going to avoid any actual or constructive receipt issues that might come up. A constructive receipt would be let’s say you close the deal. Money’s sitting in escrow. You never touched it, but you’ve got the ability to ask for it. That’s constructive receipt, and the exchange is no longer possible at that time. So it’s really important that you get us involved early. People ask all the time when I’d like to be involved. I’d say probably when you buy the property. At least when you choose to sell it. The comment about when you buy it is because I know you’re going to sell it at some point.
So we’d like you to structure the ownership in a manner that allows you to get out the way you want when you want to. So that’s why that comment about buying the thing. But as soon as you decide to sell it, your first call should be to your tax people, and figure out what your tax liability is going to be. And then you can rationalize whether you want to do an exchange or even you think about the exchange.
David Moore: But until you’ve got that very important piece of information, that’s what’s going to drive the transaction. You’ve got to look at it and say, “Okay, is it worth paying the tax today, sitting on the money, and have it ready for something in the future?” Or am I in a situation where, “Hey, I want to do an exchange. Don’t want to pay the tax. I’ve got something out there I have in mind, or I want to take 45 days to figure it out…” All those things have to be decided pre-settlement. It’s got to be structured pre-settlement. After the fact, it’s too late.
So when you engage us, it’s really easy. You’re selling something. You’re buying something. We’re going to turn it into an exchange for you. All we need to know is who you are. We need your contact information. We need to know who’s handling the closing and an escrow number. We’re going to reach out to the escrow, get a copy of the purchase sale agreement, title report, we’re going to draw up an exchange agreement and assignment agreement, escrow instructions, you’re going to get a copy of the fee schedule. You’re going to get all of this information as soon as we’ve got it prepared. You don’t sign anything or pay anything until it closes, and only if it closes.
David Moore: So really what’s happened when you get to settlement is you’re going to sign everything read and approved as the exchanger. We actually sign as a seller of the property.
Phase one, you gave us something. We sold it to the buyer. Actually, one other comment with respect to that. The deed is going to go straight from you to the buyer, and straight from the seller to you if we’re looking at a basic delayed exchange. Improvement exchanges, reverse exchanges, those are warehouse transactions, and we’re going to take ownership to a property for a period of time. But if we’re looking at basic delayed exchange, direct deeding, it’s a simple process. So from the data settlement, we’re going to send you an ID packet.
David Moore: The ID packet’s going to give you the 45th and 180th days. It’s going to say how much money is being held, give you all the identification rules in a form that has to be filled out, mailed in, faxed in, driven in. Just get it to us prior to midnight the 45th day.
Now I just said get it to us. Does it have to get to the exchange company? And the answer’s no. It’s got to go to somebody that’s a party in the transaction without an agency relationship. Who could that be? It could be the seller’s broker. It could be the seller. It could be escrow. But it can’t be your broker, and it can’t be your attorney or your accountant. It could be the exchange company. 9 times out of 10 it is us. I would say get it to us, because if you’re ever audited, they’re probably going to come to us looking for it.
David Moore: If we don’t have it, you’ve probably got some explaining to do. So, that ID packet will contain all those rules. You’ve got the three property rule, the 200% rule, the 95% rule. They’re going to be spelled out. Our ID form actually states you’re IDing these properties. You’ve got the right to buy blank of them.
And the reason we’ve done that is that through the years, the rules haven’t changed, but the policies and procedures in 1031… You cannot receive funds outside what’s called the 1031 G6 rules. So what that means is the taxpayer cannot ask for their money until they’ve acquired everything they have the right to buy. Actually, I should clarify that. You could ask for it. We’re not going to give it to you. You don’t have the right to it. We cannot give you money outside the 1031 G6 rules.
David Moore: So that 45th day is really critical. If you get in the exchange, you’re married to us for 45 days. If you get to the 45th day and you have nothing that looks good to you, don’t identify anything just in case, because if you ID something, now you’re married to us until day 181. And by the way, if you’re looking at an opportunity zone, something like that, you’re in a situation where you’ve only got 180 days to get money into that, too. So it’s really, really critical that you work through this process if you’ve engaged us to do the exchange. That 45 days, you’re either in or out on that 45th day, and more important than ever before right now in the crazy times we’re in. So really look at that stuff.
So, when you ID something, you’ve got to give what the government would deem an unambiguous description. If it’s a common address, it needs to include city, state, and zip. If you’re getting a condo, it’s got to be that specific unit. If you’ve got further questions on this topic, give us a call, but you’ve got three different ID rules. Each rule works independently. The others, too.
David Moore: But you get that idea into us. You could have negotiated the purchase before your sale property ever closed too, and that’s fine. You can put some money down, you can negotiate the purchase, just don’t let it close until your relinquished property closes. If you have to buy first, we can do that. That’s a reverse exchange. Another topic that is covered elsewhere on our YouTube channels. But all these things are the results of people’s needs and questions that are asked, and bottom line is arm yourself with as much information going into this as you can.
So those ID rules, the three property rule, 200% rule, 95% rule… You only have to satisfy one of those. If we have your money, so if you’ve put earnest money down on something prior to engaging us, that’s fine. We can reimburse you that earnest when we go buy the asset for you. If we have your money, on the other hand, we can forward earnest money on your behalf on the acquisition, but we’re not going to do that until our assignment agreements have been structured, drawn, and signed by both the taxpayer, our client, and the seller of that replacement property. So, the ID packet goes out. So phase one’s what’s relinquished. Phase two’s what’s acquired.
David Moore: So, you’ve got that escrow open, now, on the acquisition side. We’re going to, once again, need the escrow information. We’re going to reach out to escrow, get a cognitive purchase sale agreement, title report we’re going to buy, do all the buy-side documentation, and our client is just going to be signing everything, once again, as the exchange are read and approved.
We’re going to sign as the buyer. The deed, if it’s a delayed exchange, is going to go straight from that seller to our client. And at that point, really, as soon as we’ve given them the property, we’re done with the exchange. We’ve got one last set of documents that’s going to go out, and that’s just a term pack summarizing what was relinquished, received, gives an accounting for the funds. And you’re going to want to take that information and include a copy of the settlement statements from the relinquished and replacement properties and present that information to your tax people come years in so that they can do what needs to be done to do the accounting for the 1031 exchange.
David Moore: But really, when you look back on it, the taxpayer sold the property, bought a property. You could sell one property, buy 10. You can sell 10, buy one. It really doesn’t matter. You can aggregate any number of sales and purchases, and we’re just going to bunch them into, let’s say, 180 day windows. But the bottom line is you sell, you buy. We turn it into the exchange. You’re paying us a fee. The exchange company is just paid a fee to structure this transaction on your behalf.
David Moore: I hope you found this helpful. I encourage you to reach out with any questions you might have on this topic. If you’ve got other ideas for other topics you’d like to see us address, we’re happy to do so. Please reach out to cmoore@1031exchange.com with any of those inquiries. And thank you very much for joining us today. Once again, David Moore, Equity Advantage, 1031exchange.com, and all my best to you. Take care. Bye.
The sooner you involve the team of professionals at Equity Advantage in your 1031 exchange, the better. They’re seasoned experts who know all the ins and outs of this complicated transaction. Call them at 503-635-1031. and protect your investments!
