The Qualified Intermediary, also known as a Facilitator, Accomodator or Strawman, is the term used to describe a third party principal to a transaction whose purpose is to transfer property and money thereby insulating the Exchanger both from agency issues and from actual or constructive receipt of funds issues. The Qualified Intermediary acts as a middleman by interfacing proceeds from the sale in a Qualified Escrow Account and maintains an arm’s length relationship with the Exchanger thus providing a Safe Harbor>. The Relinquished Property and Buyer of the Replacement Property. The Intermediary provides the documentation to extablish an exchange and to provide the best paper trail if ther should ever be an audit. The intermediary instructs the title company or attorney’s office in completing the paperwork to achieve an exchange rather than a sale. The Intermediary is available to answer questions from all interested parties throughout the entire exchange process.
Internal Revenue Treasury Regulations issued June of 1991 specified in Reg. 1.1031(k)-1(g)(4)(iii) that a disqualified person could not function as a Qualified Intermediary and defined a disqualified person as:
- Any person who is an agent of the taxpayer at the time of the transaction or any person who has acted as the taxpayer’s employee, attorney, accountant, investment banker, real estate agent or broker within the two year period ending on the date of the transfer of the first of the relinquished properties;
- Any person who is related to the taxpayer including any family members;
- Any individual, partner or corporation where a related party owns more than 10% of capital or profit interest or stock value, or;
- Two corporations in a controlled group, a grantor and fiduciary in a trust, or any entity that would appear to be an agent under local law.
Like-kind property is any property held for use in a trade or business (income producing) or for investment purposes. Like kind does not mean like usage! The following are examples of properties that could all be considered like kind under section 1031:
- Forty Acres of Unimproved Agricultural land
- Chain Hotel or Family Run Motel
- Unimproved Waterfront Property
- Apartment Complex
- Office Building
- Camping Resort
- Retail Shopping Center
- Gas Station
- Vineyard and Winery
- Rental Resort Condo
- Single Family Rental
- Adult Foster Care Home
The following are not considered like kind properties under the code and are therefore not exchangeable under section 1031:
- Partnership Interests.
- Stocks, Bonds, Notes, Securities, Certificates of Trust, Good Will.
- Property Held Primarily For Resale, or as Stock-in-Trade.
- The obvious, to defer the capital gains tax. Why not leverage your hard earned equity into new properties?
- Simplify management. Exchange many properties into fewer or more manageable properties.
- Spread your risk. Exchange one larger property into different types or locations.
- Move your investments to areas offering more attractive economic conditions or to accommodate the relocation of your residence.
- Trade low or no income producing property (unimproved land) and enjoy a positive cash flow.
- Retirement planning. Acquire property requiring less management and upkeep on your part or separate holdings for your heirs. (Heirs will inherit the property at a stepped-up basis).
1031 tax deferred exchanges are not tax free exchanges. The taxes do not disappear, they are deferred until you sell a property without structuring it as an exchange. Any cash you receive out of an exchange transaction, regardless of how much you originally invested, will be subject to capital gains taxes. In order to be completely deferred you must put all of the cash out of the sale into the new property plus you must undertake at least the same amount of debt as you had on your other property. This basically means that you must buy something for roughly equal to the sale price of your Relinquished Property. If you want to reduce the amount of debt on your new property and pay no taxes, you will need to add cash to pay for the Replacement Property. If, at the closing on your new property, you take out a mortgage larger than you need to close so that the result is your receiving cash, the cash will be subject to capital gains taxes.