Real estate investors are allowed to postpone the payment of applicable taxes owed when they sell their real estate property and swap it with a similar asset of comparable or greater worth courtesy of section 1031 of the Internal Revenue Service (IRS) code.
The IRS originally intended that the rule provided deferments as needed for an authentic transaction. However, the inherent constraints and limitations of the code allow investors to capitalize majorly on postponed transactions in which case the investor does sell the designated asset but employs the services of a Qualified Intermediary or Exchange Accommodator who keeps the transaction proceeds in third-party accounts.
Subsections of the code allow the QI releases the sale proceeds to enable the investor to acquire substitute assets (max of 3) once they’ve been identified by the investor. Interested in knowing how to become a 1031 Qualified Intermediary? You’re at the right place. This article discusses how to become a Qualified Intermediary. Read to the end to discover how!
What is a Qualified Intermediary and When Do Exchangers Need a QI?
Exchangers typically work through a Qualified Intermediary. Although in cases when payments get cleared within 24 hours, they aren’t required. Yet, engaging the services of such professionals could be advantageous especially as they provide valuable counsel and expertise to assist investors to manage the complex transfer procedure.
When proceeds from a repossessed home are cleared immediately, the bank transfer runs a chance of not starting on schedule, possibly causing a lag that might invalidate the transaction.
It’s not beyond the IRS to see the investor’s actions in such scenarios as accepting possession of the exchange funds, subsequently nullifying the transaction leaving the investors with a hefty bill in taxation on the gains from the sale of their property.
It’s important to note that two critical requirements have to be satisfied in the course of performing a 1031 exchange otherwise the exchange process becomes void. For one, investors must tender a maximum of three substitute assets within 45 days of the repossession of their relinquished properties. Failure to keep up with these nullifies the entire transaction.
Visit this link to check how to become a 1031 Qualified Intermediary and start on the path of a promising career as soon as you can afford to.
What is the Compensation Structure for a QI?
To remain autonomous, lots of QIs demand a service fee. Payment structures typically differ with Qualified Intermediaries. Most companies usually demand that clients pay a processing charge to set up the requisite escrow account for the transaction proceeds and subsequently bill separately for all work regarding documentation. For others, they hold on to the returns that accumulate on the gains kept in escrow for the exchanger.
It’s not beyond other companies to incorporate both payment clauses into agreements they’ve signed with the exchangers.
Unless the accommodator’s contract has been sealed and agreed upon by both parties. It would be untypical for the IRS to not void the whole exchange process consequently forcing the investor to ultimately pay the capital gains tax.
Clauses in section 1031 also allow that a law firm or an independent solicitor undertake a 1031 exchange agent services in support of an investor who has no legal contracts with the said firm or attorney.
Steps to Becoming a Qualified Intermediary
Suppose you’d like to know how to become a 1031 qualified intermediary, the first important thing you should keep in mind is that you don’t need to be certified or licensed before you can act as a QI for an investor.
The sole requirement by the IRS is that the intending QI must not have contracted for or have been employed by the exchanger in any capacity in the immediate two years. That applies to all legal, accounting or medical needs the QI might have required.
The QI is expected to:
- Generate all paperwork relevant to the exchange process
- Work out the details of the 1031 exchange with the taxpayer
- Compile and keep essential documentation on hand
- Set arbitration guidelines for every transfer to be concluded
- Receive the exchange property from the seller to transfer to the buyer
- Assume command of the transaction profits by setting up a third-party account to keep the monies out of the seller’s possession
- Upon waiting for the 45-day replacement asset identification timeline, keep the funds in a safe place
- Obtain detailed info about potential substitute assets
- Generate comprehensive bookkeeping of the deal
How Do You Work as a 1031 Exchange Qualified Intermediary?
Upon the exchanger reaching out to you, the immediate phase would be to sign an Exchange Contract that legally enforces an agreement between two business operators. Prior to agreeing to the stipulated terms, make sure your legal officer skims through to ensure your interests are protected and rid the contract of any unclear wording.
The exchange procedure can subsequently commence after the Exchange contract has been completed. To guarantee that the procedure follows IRS requirements and minimize the chances that your exchanger inadvertently gets billed hefty taxes on their transaction proceeds, the paperwork should be completed well before the closing of purchase on the sold property.
As the Accommodator, you’re responsible for a multitude of tasks, including processing the funds from the transfer of properties and producing the necessary documents to meet IRS section 1031 regulations. As such you’re indispensable to the whole exchange process.
Digging deeper, here’s how you help investors in the course of a 1031 transaction:
- Sticking with Deadlines
As a QI, you must keep your client up to speed with the verity of the infamous 45-day property tender periods and 180-day closing periods. Failure to meet up with any of these nullifies the entire exchange procedure subsequently ensuring your client pays a substantial portion of their profits in taxes.
- Safeguarding Income From Exchanges
The investor is required by the 1031 code to refrain from holding on to proceeds from the transfer of their property as long as they prefer to not spend on depreciation recapture or capital gains taxes.
The investor would forward the monies to the 1031 Exchange Intermediary who would subsequently store them in a third-party account barring their necessary release for a future purchase.
Final Thoughts
There you have it. As a QI, your role is crucial to the success of the property exchange process. However, you must take great care to ascertain that you’ve not had any business operations with the intending exchanger in the last two years as that would nullify the entire exchange process and cause your client to pay a sizable chunk of their profits as taxes.
Keep in mind that you don’t need any certification to become a Qualified Intermediary. Nonetheless, we highly recommend that you pitch your tent with the Federation of Exchange Accommodators to better advocate and safeguard your common interests.