What is a QI?
A Qualified Intermediary “QI” is an entity who enters into a written agreement with the taxpayer (“exchanger”) to acquire the exchanger’s rights and/or ownership interest in the property the exchanger is selling (“relinquished property”), and transfer such ownership interest into one or more properties of “like-kind” that the exchanger chooses to buy (“replacement property”). A QI is required by tax law and provides a safe harbor for the taxpayer (exchanger).
In other words, the intermediary is “assigned in” as the seller of the property during the closing process.
The Role of the QI
The most common exchange format, the delayed exchange, requires investors to work with an IRS approved middleman called a “Qualified Intermediary” (QI) who facilitates the exchange; and is further defined as follows: Not a related party (i.e. agent, attorney, accountant, investment banker, broker, or real estate agent, etc.);
Receives a fee; receives the relinquished property from the exchanger and sells to the buyer. Purchases the replacement property from the seller and transfers it to the exchanger.
Although Section 1031 refers to “an exchange of property”, it does not require a simultaneous “swap” of properties. A Qualified Intermediary “QI” is an entity who enters into a written agreement with the taxpayer (“exchanger”) to acquire the exchanger’s rights and/or ownership interest in the property the exchanger is selling (“relinquished property”), and transfer such ownership interest into one or more properties of “like-kind” that the exchanger chooses to buy (“replacement property”). A QI is required by tax law and provides a safe harbor for the taxpayer (exchanger).
In other words, the intermediary is “assigned in” as the seller of the property during the closing process. It is the assignment that allows the seller to become an exchanger and, essentially convert an otherwise taxable sale and subsequent purchase of investment real estate into a tax-deferred exchange.
Because the intermediary is technically the seller who receives the sale proceeds, it prevents the exchanger from being in “actual or constructive receipt” of the proceeds; thus, there is nothing to tax.
Choosing a Qualified Intermediary A QI should be investigated for their experience, background and credentials. They should have extensive real estate and 1031 Exchange knowledge and expertise.
Due to the complexity of the 1031 Exchange, it is in the best interest of the exchanger to hire a QI that is a Certified Exchange Specialist™. This designation demonstrates that the QI possesses a higher level of knowledge a, experience and have passed the national examination administered by the Federation of Exchange Accommodators (FEA), a national organization for qualified intermediaries. A person who receives the CES™ is required to uphold a strict Code of Ethics & must meet continuing education requirements to retain this designation.
QI Requirements: A requirement of Section 1031 Exchanges is that you must use a Qualified Intermediary (“QI”). The QI cannot be someone with whom you have had a business or family relationship. You must use an independent organization whose only contact with you is to serve as QI. The Exchanger or a disqualified person cannot qualify as qualified intermediaries for their own exchange. A person is a disqualified person if the person is an agent of the exchanger. For example, your attorney, accountant, broker or brother are all disqualified.
The QI does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:
Coordinate with the Exchangers and their advisors to structure a successful exchange.
Prepare the required documentation for the Relinquished Property (1st Leg) and Replacement Property (2nd Leg).
Provide specific instructions to escrow to affect the exchange.
Secure the funds in an insured bank account until needed for disbursement to escrow to acquire the replacement property.
Prepare, manage and provide a complete accounting of the transaction to the Exchanger and/or their tax advisor at completion of the exchange.
If and when you determine that you want to undertake a 1031 Exchange, you must involve the QI prior to closing of the sale of your relinquished property.
There is no safe holding period for property to automatically qualify as being “held for investment”. The amount of time a taxpayer holds the property is not the only determining factor, but it does play an extremely important role in demonstrating intent. The easiest way to demonstrate intent to hold a property is to do just that – hold it. And, the longer the better.
In one private letter ruling (PLR 8429039), the IRS stated that a minimum holding period of two years would be sufficient. Although a private letter ruling does not establish legal precedent for all taxpayers, there are many advisors who believe two years is a conservative holding period, provided no other significant factors contradict the investment intent.
Tax advisors frequently recommend that taxpayers hold the subject property for a minimum period of at least one year. A holding period of one year means the taxpayer will mostly likely reflect the investment property in two tax filing years, listing rental income, expenses and depreciation, which provide a solid case to prove the intent to hold.
Identifying Replacement Property
The identification period in a delayed exchange begins on the date the Exchanger transfers the relinquished property and ends at midnight on the 45th calendar day thereafter. To qualify for a §1031 tax deferred exchange; the tax code requires identifying replacement property in the following manner:
In a written document signed by the Exchanger;
Hand delivered, mailed, faxed, or otherwise sent;
Before the end of the identification period to;
Either the person obligated to transfer the replacement property to the Exchanger (generally the “Qualified Intermediary”) or any other person involved in the exchange other than the taxpayer or a disqualified person.
The replacement property must be unambiguously described (i.e. legal description, street address or distinguishable name). The type of property should be described in a personal property exchange.
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