According to The Federation of Exchange Accommodators (FEA and 1031 Exchange Accomodator), a Qualified Intermediary (QI) plays a critical role in ensuring smooth transactions in 1031 exchanges. Business and individuals use 1031 exchanges as a way of maximizing the value of their assets after the sale of those assets. By working with a firm that specializes in these transactions, the profits on any sale of those assets are tax-deferred through exchanges, or purchases of other property. The QI manages that process, and they are referred to as accommodators or exchange facilitators. And they are critical for actually realizing the tax benefits provide for in the relevant tax regulation.
Without a QI, the IRS does not recognize the transaction as complying with the regulations that permit for the tax benefits associated with 1031 exchanges. So, having an accommodator is absolutely essential to qualifying for the tax benefit. However, it is also important to ensure that the one you work with is well-educated on the subject and qualified to handle the transaction. Given the asset values in question in these transactions, the role of the accommodator is quite important.
“The use of a QI as an independent party to facilities a tax-deferred exchange, is a safe harbor…When the taxpayer engages the services of a QI, pursuant to an exchange agreement, the IRS does not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are need to acquire the replacement property. The QI delivers the funds directly to the closing agent who deeds the property directly to the taxpayer,” says the FEA on its website.
Accreditation one key to qualification
These 1031 exchanges can be quite complicated. Some buy and sell transactions are done simultaneously, but others are not. Also, the regulations that determine what does and does not qualify for tax benefit can be difficult to decipher. So, it is important to ensure you are working with an experienced professional. Accreditation is one signal of the accommodator’s experience and background in dealing with these transactions.
The FEA offers a certification program, which is aimed at bolstering the professionalism of the industry and ensuring that there is a means of providing important education about the many, sometimes obscure topics, related to exchange accommodators. Being certified through this program means that the accommodator has met the industry’s standards for knowledge about these topics.
There are numerous companies that specialize in 1031 exchanges, including IPX, Orexco and others. In addition to hiring qualified accommodators, these companies also provide important guarantees. The companies guarantee the transfer of funds for as much as up to $100 million. The FEA website provides a locator for these exchange professionals.
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