Following is a detailed point-by-point explanation of what a Qualified Intermediary does for you during a 1031 exchange.
- Coordinates with you (the seller or exchanger) and any adviser on the structure of the 1031 exchange.
- Prepares documentation concerning the relinquished property and the replacement property.
- Provides instructions and the appropriate documents to the escrow or title company concerning the exchange.
- Creates an arm’s-length transaction in the agreement between you (the seller or exchanger) and the Qualified Intermediary, transfers the property you are selling to the QI, who then conveys the property to the new buyer.
- Takes control of the funds from the sale of the relinquished property and typically deposits these funds into a separate and insured account.
- Does not allow you, the seller, to take constructive receipt of the funds from the sale.
- Holds the funds from the sale of the relinquished property during the 45th-day identification period.
- Receives and holds the written information about potential replacement properties.
- When the replacement property has been selected, transfers your funds for the purchase and disburse them to the title or escrow company for its purchase.
Acquires the replacement property in the QI’s name and then conveys title to you (the seller or exchanger) by deed.
- Submits a complete accounting of the 1031 exchange for your records.
- Submits a 1099 to you (the seller or exchanger) and the IRS for any paid growth proceeds (interest earned).
When it is time to sell an investment property (i.e. expectations were met, properties fully depreciated, time to retire from active management, etc.), there are many factors to consider. Whether an investor is seeking to maximize gains, looking to increase the level of income or seeking to expose of an under performing asset, simply liquidating a property can create several taxable and recapture liabilities and obligations. Investors are taking the first step in maximizing investment results by executing a 1031 exchange. Within some of the highest tax brackets, simply “cashing out” can erode up to 40% of gains on profitable, low basis assets on a combined state and federal level. With guidance from the Internal Revenue Service, investment sponsors construct securitized “real property” investments for use as a suitable replacement property in a 1031 exchange.
By reinvesting sale proceeds into a securitized, fractional real property program, investors may:
- Defer tax liabilities indefinitely.
- Keep investment dollars fully invested.
- In many cases, improve upon the grade and quality of holding.