As a successful real estate investor, you may already know the benefits of using a 1031 exchange to defer tax liability when selling an investment property. The use of 1031s is common, but actually using the proceeds from a sale to pay for a new property can be complicated. If you are considering a doing a 1031 exchange but you don’t know where to start, you will need to hire a qualified intermediary. The IRS has a variety of rules you must follow if you wish to reap the benefits of an exchange, and a qualified intermediary can ensure you follow them all.
What Does an Exchange Intermediary Do?
According to treasury regulations, you must hire a qualified intermediary if you wish to defer capital gains taxes through an exchange. When selling the property you wish to exchange, you may not obtain the proceeds directly. Instead, you will be expected to sell the property through a qualified intermediary, who will sell the property for you and obtain the funds from the sale. If you choose to receive funds, you will need to pay taxes on those funds.
Of course, the intermediary does not keep the funds. Once the sell is complete, the intermediary will hold the funds in escrow. They will then use the funds to purchase the replacement property you wish to obtain. If there are any funds remaining after the exchange, the intermediary will return them to you.
Who Can Serve as an Intermediary?
There are no licensing requirements to become an intermediary, but many investors entrust one of the following individuals:
- Attorney
- Investment broker
- CPA
- Real estate agent
- Employee
You may not choose a person who is related to you or anyone who has served as your intermediary in the last two years.
Finding the Right Intermediary
Looking for an intermediary can be a daunting task, but you must have one if you want to do an exchange. Fortunately, there are ways to find the right intermediary. When performing an exchange, you will be required to adhere to a strict schedule, so you should choose an intermediary you know you will have access to when the time comes.
Your intermediary should be experienced and know how to properly handle a 1031 exchange. Some exchanges can be complicated, and having a novice on your side can work against you at times. Don’t be afraid to research a potential intermediary’s reputation. Any intermediary you choose should be insured as well.
Do Your Research
Finding the right 1031 exchange qualified intermediary is possible with time and a bit of research. By choosing the right intermediary, you can set yourself up to reap a variety of tax benefits.