Qualified Intermediary

Definition

A Qualified Intermediary (QI) is a neutral third party that facilitates Internal Revenue Code Section 1031 exchanges, commonly known as like-kind exchanges. The primary role of a QI is to hold the proceeds from the sale of the property (relinquished property) and use those proceeds to purchase a new property (replacement property) on behalf of the taxpayer. This helps the taxpayer defer capital gains taxes on the sale of the property. To meet the qualifications, this intermediary must not be an agent, employee, or relative of the taxpayer looking to exchange property.

Examples

Example 1: Jackson wants to buy land from Inge. However, Inge wants to defer capital gains taxes, so they agree to use a Qualified Intermediary. They contract with a title insurance company to hold the necessary funds and complete the delayed exchange, allowing Inge to defer the taxes.
Example 2: Maria owns a commercial building and wants to use the proceeds to buy another property. To defer capital gains taxes, she sells the building, with the funds held by a QI, who then uses those funds to purchase a new commercial property within the IRS-mandated timeframes.

Frequently Asked Questions

What is the role of a Qualified Intermediary in a 1031 exchange?

A Qualified Intermediary facilitates the 1031 exchange process by holding the sale proceeds from the relinquished property and then using those funds to acquire the replacement property, ensuring that the transaction meets IRS regulations.

Who can serve as a Qualified Intermediary?

Any person or entity that is not the taxpayer or a disqualified person (such as relatives or agents of the taxpayer) can serve as a Qualified Intermediary. Even certain professionals like lawyers or real estate agents may qualify if they have not represented the taxpayer in the past two years.

How does a Qualified Intermediary help with tax deferral?

By holding the sale proceeds and managing the acquisition of the replacement property, the QI ensures compliance with IRS regulations, thus allowing the taxpayer to defer capital gains taxes that would otherwise be due on the sale.

Can the taxpayer touch the proceeds during a 1031 exchange?

No, receiving or controlling the proceeds from the sale of the relinquished property violates the 1031 exchange rules, which would disqualify the transaction for tax deferral. Proceeds must be held by the Qualified Intermediary.

What are the key timelines for a 1031 exchange managed by a QI?

The taxpayer has 45 days from the sale of the relinquished property to identify potential replacement properties and 180 days from the sale to complete the acquisition of the replacement property.

Section 1031 Exchange: A tax-deferral strategy allowing a taxpayer to defer paying capital gains taxes on investment properties when they are sold, if another property is purchased.
Delayed Exchange: A type of 1031 exchange where the replacement property is acquired within specific timelines post the sale of the relinquished property.
Relinquished Property: The property being sold in a 1031 exchange.
Replacement Property: The new property being acquired in a 1031 exchange.

Online Resources

References

Internal Revenue Service, “Publication 544 (2022), Sales and Other Dispositions of Assets,” https://www.irs.gov/publications/p544
Federation of Exchange Accommodators, “1031 Exchanges Explained,” https://www.1031.org/about1031/1031exchanges.htm

Suggested Books for Further Studies

Estate Planning with Section 1031 Exchanges by Richard Cropper et al.
1031 Tax-Deferred Exchanges by Gary Gorman
Real Estate Taxation: A Practitioner’s Guide by David F. Windish

Real Estate Basics: Qualified Intermediary Fundamentals Quiz

### What is a Qualified Intermediary responsible for in a 1031 exchange? - [x] Holding the sale proceeds and purchasing the replacement property - [ ] Investing the taxpayer's proceeds in varied assets - [ ] Maintaining detailed property management records - [ ] Actively seeking potential buyers for the relinquished property > **Explanation:** A Qualified Intermediary is primarily responsible for holding the proceeds from the sale of the relinquished property and purchasing the replacement property to ensure compliance with IRS rules. ### Can the taxpayer directly manage the sale proceeds in a 1031 exchange? - [ ] Yes, they must handle it to close the sale quicker. - [x] No, they cannot receive or control the proceeds. - [ ] Only up to 50% of the proceeds can be managed directly. - [ ] Yes, but only if the transaction completes within 45 days. > **Explanation:** The taxpayer cannot receive or control the proceeds in a 1031 exchange as this would disqualify the transaction for tax deferral under IRS rules. ### What is the primary benefit of using a Qualified Intermediary? - [ ] Providing tax consultancy services - [ ] Offering real estate advice - [x] Facilitating tax deferral on capital gains - [ ] Ensuring lower purchase prices for properties > **Explanation:** The main benefit of using a Qualified Intermediary is facilitating the 1031 exchange to defer capital gains taxes on the sale and purchase of like-kind properties. ### How long do taxpayers have to identify replacement properties in a 1031 exchange? - [ ] 15 days - [x] 45 days - [ ] 90 days - [ ] 180 days > **Explanation:** Taxpayers have 45 days from the sale of the relinquished property to identify potential replacement properties in a 1031 exchange. ### In what type of exchange is a Qualified Intermediary typically involved? - [ ] Reverse exchange - [ ] Personal property exchange - [ ] Simultaneous exchange - [x] Delayed exchange > **Explanation:** A Qualified Intermediary is typically involved in a delayed exchange, where there is a time gap between the sale of the relinquished property and the acquisition of the replacement property. ### What is another term for the property sold in a 1031 exchange? - [ ] Target property - [ ] Initial property - [x] Relinquished property - [ ] Investment property > **Explanation:** The term "relinquished property" refers to the property sold in a 1031 exchange, which will be replaced by a new property. ### How long do taxpayers have to complete the acquisition of the replacement property? - [ ] 45 days - [ ] 90 days - [ ] 120 days - [x] 180 days > **Explanation:** Taxpayers have 180 days from the sale of the relinquished property to complete the acquisition of the replacement property in a 1031 exchange. ### What kind of entities can NOT serve as a Qualified Intermediary? - [ ] Attorneys - [ ] Title insurance firms - [ ] Exchange companies - [x] Relatives of the taxpayer > **Explanation:** Relatives of the taxpayer cannot serve as a Qualified Intermediary, which ensures that the intermediary remains impartial and unbiased in the transaction. ### What is the main requirement for a Qualified Intermediary? - [x] They must be a neutral third party - [ ] They must be related to the taxpayer - [ ] They must have represented the taxpayer in the last 2 years - [ ] They must be government-certified > **Explanation:** The main requirement for a Qualified Intermediary is to be a neutral third party to ensure an unbiased process in accordance with IRS rules. ### What specific part of the tax code governs 1031 exchanges? - [ ] Section 179 - [ ] Section 401 - [x] Section 1031 - [ ] Section 1250 > **Explanation:** Section 1031 of the Internal Revenue Code governs the rules and regulations for like-kind exchanges, allowing for tax deferrals on property sales and purchases.