Qualified Intermediary (QI)
Qualified Intermediary (QI)
We provide a qualified intermediary (QI) to every exchanger, a role essential in every 1031 exchange. Nearly 30 years ago, the IRS updated IRC section 1031 to require the use of a qualified intermediary (QI) to hold funds when transacting the sale and purchase of real estate through a 1031 exchange.
Why Use a Qualified Intermediary?
To successfully complete a 1031 exchange the exchanger/taxpayer must never be in receipt of relinquished funds (from the sale of the investment property) otherwise the tax deferral advantage of a 1031 exchange is disallowed.
Past difficulty accessing funds as a result of judgements, liens, bankrupty or other obstacles made completing an exchange often difficult. As a result newer regulations created a safe harbor for the taxpayer while the exchange was in progress.
The role of the qualified intermediary began with all parties to the real estate transaction buying and selling through the qualified intermediary.
Historically, the difficulty of accessing funds as a result of judgements, liens, bankruptcy or other occurrences made completing a 1031 exchange challenging. However, modern revisions to the regulations have created a “safe harbor” for the taxpayer. The role of the qualified intermediary (QI) begins with an investor selling and buying through a qualified intermediary.
QI Role
- Structure the exchange and assemble necessary documents
- Safeguarding sales proceeds with an escrow account specifically for each 1031 exchange
- Oversee compliance with federal/state 1031 exchange directives and deadlines.
A qualified intermediary facilitates a 1031 exchange under section 1031 and its regulations. The QI may NOT be the taxpayer or a disqualified person.
According to Section 1.1031(k)-1(g)(4)(iii), an intermediary must enter into a written exchange agreement with the taxpayer in order to qualify as a “qualified” intermediary, and acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer, as required by the exchange agreement.
Your QI purchases the relinquished property and sells the replacement property to the taxpayer. During the exchange period, the QI also holds the funds from the sale of the relinquished property until the replacement property is purchased, thus meeting the constructive receipt restrictions.
COMINGLING
Client funds are held in segregated accounts by nationally chartered banks.
E&O INSURANCE, FIDELITY BONDING
The fidelity bond and errors and omissions coverage provided by Directrust meet all state requirements and best practices.
REGULATIONS AND STATUTES
In the case of qualified intermediaries, there are no federal regulations. As a member of the Federation of Exchange Accommodators (FEA), Directrust strives for higher standards of professionalism. These include qualified escrow accounts for client funds, minimum bond and insurance requirements, and more.