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II. The Role of The Qualified Intermediary The use of a Qualified Intermediary, also known as an "Accomodator" or "Facilitator" is essential to completing an IRC 1031 Tax Deferred Exchange. Many title companies provide this service for a cost ranging from $300.00 - $500.00. A. Acts As A Principal The IRS stipulates that a reciprocal trade or actual exchange must take place in each IRC 1031 transaction. This means the Exchanger must assign to a Qualified Intermediary (1) their interest as seller of the relinquished property and (2) their interest as buyer of the replacement property. By becoming an actual party to the exchange, a reciprocal trade takes place even when there are three or more parties involved in an exchange transaction (i.e. when the Exchanger is purchasing the replacement property from someone other than the buyer of their relinquished property). B. Prepares Legal Documentation Several legal documents are necessary in order to properly complete an exchange. The Qualified Intermediary will prepare an Exchange Agreement, two Assignment Agreements and Exchange closing instructions for each closer. C. Provides Quality Service Although the process of an IRC 1031 exchange is relatively simple, the rules are complicated and filled with potential pitfalls. We work with both parties every step of the way. III. The Delayed Exchange/Starker Exchange There is a common misconception that all tax-deferred exchanges are complicated and require all properties, relinquished and replacement, to close concurrently. Fortunately, the most common exchange variation, the delayed exchange (also referred to as a deferred or "Starker" exchange, Starker v. U.S., 602 F.2d 1341), provides Exchangers with more flexibility and options in acquiring the replacement property than the simultaneous exchange. The delayed exchange begins when the Exchanger's first relinquished property is sold and is completed when the last replacement property is acquired within the prescribed exchange period- To provide the required notice to the relinquished property buyer(s) and the replacement property seller(s), the Purchase and Sale Contract for each property should include an "exchange cooperation". The use of a Qualified Intermediary is the most common method used to complete a valid delayed exchange quickly and easily. The Qualified Intermediary is an independent party to the exchange transaction, who performs the function of creating the reciprocal trade of properties for the exchange, holds the exchange funds and supplies the necessary exchange documents, such as the Exchange Agreement, Assignments and Closing Instructions. The Exchanger assigns the rights in the Sale Contract for the relinquished property and in the Purchase Contract for the replacement property to the Qualified Intermediary, who essentially becomes the "seller" of the relinquished property and the "buyer" of the replacement property. To avoid actual or constructive receipt of the exchange funds by the Exchanger, the proceeds from the sale of the relinquished property are held by the Qualified Intermediary until they are needed for the acquisition of the replacement property. In both simultaneous and delayed exchanges in which a Qualified Intermediary is used to create the reciprocal exchange of properties, the IRS allows "direct deeding" of the relinquished property from the Exchanger to the buyer and of the replacement property from the seller to the Exchanger, thereby avoiding the necessity of the Qualified Intermediary holding title to any property (Revenue Procedure 90-34, 1990-1 C.B. 552). Direct deeding avoids the assessment of double state, county, or local documentary transfer taxes and any liability on the part of the Qualified Intermediary for environmental hazards that may exist on the property. IV. Additional Important Information To Know About 1031 Exchanges The informed investor who chooses to relinquish their property by using the 1031 Tax Deferred Exchange should attempt to gain further knowledge of the various aspects available in the program. |