In order to complete a successful 1031 exchange, an investor must not take constructive receipt of the proceeds from the sale of the relinquished property.
If an investor were to receive any money such as a wire from escrow to their bank account or even an uncashed check with the closing proceeds, this capital would become irreversibly taxable.
To avoiding taking constructive receipt of the proceeds during a 1031 exchange, it is imperative that an investor have a Qualified Intermediary (“QI”) hold the capital during the period between the sale of the relinquished property and the acquisition of the replacement property.
A QI receives the proceeds from the sale of a 1031 investor’s relinquished property from the buyer and then, when it is time to close on the replacement property, forwards the funds for the purchase of the replacement property to the seller. The QI also helps the 1031 investor with the appropriate tax and legal paperwork throughout the transaction to show that an investor complied with the 1031 guidelines laid out by the IRS.
For this reason, QIs are often called “Facilitators” or “Accommodators.” QIs are essential to the 1031 exchange process (with the extremely rare exception of a simultaneous closing on both the relinquished and the replacement properties), there are several considerations an investor must be aware of when selecting a QI for their exchange. It is especially important that investors are careful in selecting the right QI since this particular industry is unregulated and has a number of pitfalls that could put the investor at risk of a failed exchange—or worse: the loss of some or all of their principal!
Do You Need a Qualified Intermediary?
DST Investments maintains relationships with a select number of established industry-leading QIs. If you are considering a sale of investment or business property and want to defer your capital gains taxes utilizing a 1031 exchange, we can refer you to a QI without cost or obligation.
For more information, fill out our Contact Us form to learn more.