Capitalizing on the tax advantages of a 1031 exchange requires the services of a Qualified Intermediary (QI), or accommodator. Their role, that of the third party which holds funds from sold properties as replacement properties are being acquired, is defined in the tax code; without them, there can be no tax benefit from the exchanging of like-kind properties. But this is not the only role of the exchange accommodator. In what can sometimes be very complicated asset exchanges, accommodators ensure the smooth and safe transfer of assets.
Setting it up and managing an exchange effectively is not trivial. Because of this, and because the stakes are typically high, the accommodator selected for the transaction can have a meaningful impact on its ultimate success. So the selection of the accommodator is important. QIs work with property owners to determine the type of exchange that is best in any given situation and then manage the steps of the exchanges to ensure procedures are being followed and financial goals are being met.
Basics of 1031 exchanges
The 1031 exchange is a provision in the tax code that allows property owners to avoid capital gains tax on the proceeds from the sale of that property by exchanging it with property that is of like-kind. They are used by businesses and individuals alike, but the definition of “like-kind,” varies depending on whether it the property is owned by a company or a person. Like-kind is defined more broadly for commercial purposes, so for, example, the class or grade of the asset is not material, it only matters that they are the same kind of asset. Conversely, with individual property both the type of property and its class must be the same for the relinquished and the new property.
There are several different types of exchanges, including those that can be done simultaneously, in which case the properties are exchanged at the same time. Exchanges can also be set up so that the purchase of the new property precedes the purchase of the existing property.
How to select the right coordinator
It is not possible to conduct a 1031 exchange yourself and still qualify for the tax benefit, so accommodators must be part of the exchange. When looking for a QI consider looking at The Federation of Exchange Coordinators (FEA). FEA is an industry organization that sets the qualification criteria for QIs and conducts the training and accreditation processes for them.
The FEA website provides background on qualification criteria for certification and features a QI locator, which can help you find the names of QIs in your area to work with.
Qualification comes through experience, accreditation
When evaluating a QI company, think about whether you need a local company or one that has a nationwide or region-wide reach.
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