The U.S. Treasury adopted regulations in 1991 which govern Section 1031 “like-kind” Exchanges. Since then, many thousands of investors have utilized IRC 1031 exchanges to defer capital gain taxes on the sale of their business, investment or income property with the assistance of a professional Qualified Intermediary (“QI”).

A QI handles the mandatory mechanics of a 1031 exchange for an investor. An exchange must be facilitated by an independent third-party according to the US Treasury Regulation 1031.1031(k)-1(g)(4)(iii).

It is imperative to have an exchange agreement and use a QI, so that the IRS does not consider a taxpayer to have taken constructive receipt of the proceeds from a sale/disposition. Upon closing, proceeds of the sale will go directly to the QI, rather than the taxpayer. The QI will then hold the funds until they are needed to acquire a replacement property or properties, at which time the QI will send the funds directly to the closing agent who deeds the property to the exchanger.

According to US Treasury Guidelines, a QI is Specifically Defined as:

1. A person who is neither disqualified nor the taxpayer entering the exchange.

2. A person under contract with the taxpayer in an Exchange Agreement. The QI has four specific responsibilities to the taxpayer, specifically to:

  • Acquire relinquished properties from the taxpayer.
  • Transfer the relinquished property.
  • Acquire the replacement property.
  • Transfer the replacement property to the taxpayer.

3. The Exchange Agreement contract must state that there is a limit to the taxpayer’s rights to receive, donate, borrow, or obtain benefits of money or other property which is held by the QI in some other method. This is in accordance with US Treasury Regulations §1031.1031(k)-1(g)(4)(i).