If you own a home that you are thinking of putting up for sale so you can buy another then you must familiarize with 1031 exchange, which allows you to swap off one investment property for another thereby giving room for the deferment of capital gains taxes.

1031 exchange is coined from the Section 1031 of the U.S. Internal Revenue Code (IRS Section 1031), you can check out Montana 1031 Exchange if you need a qualified intermediary to mediate your 1031 exchange.

Who is a qualified intermediary?

A qualified intermediary is one who facilitates the 1031 exchange between the buyers and sellers. Direct swaps can be difficult to accomplish because the parties may not each have something the other wants but with a Qualified Intermediary, the difficulties of direct swaps are avoided.

The involvement of a qualified intermediary is not only expensive it also has its inherent risks, the Qualified Intermediary will be entrusted with a huge sum of some for as long as it takes to complete the transaction.

What does a qualified intermediary do in  a 1031 exchange?

If you are selling a property whose proceeds you want to invest in another like-kind property you are ineligible to receive the proceeds directly. This is where the qualified intermediary has a role to play.

The qualified intermediary (QI) sells the property in question, collects the fund from that sale and then uses the fund to acquire a replacement for you.

If you receive any money from the sale directly, you will have to pay capital gains taxes on that amount. Once the replacement property  is acquired, the QI transfers the deed to you to complete the exchange and If there are any proceeds remaining after purchasing the replacement property, the qualified intermediary will return those funds to you.

What type of property qualifies for 1031 exchange, well according to the IRS, it says like-kind properties.

“Both properties must be similar enough to qualify as ‘like-kind.’ Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like-kind to land.”

It is important to state that although 1031 exchange is commonly used in Real Estates, it also includes property outside Real Estate.

Who can be your qualified intermediary?

There are no professional or academic qualifications as prerequisites for serving as an accommodator or qualified intermediary. However, the IRS requires under Internal Revenue Code (IRC) section 1031 that neither can you be an intermediary for yourself, nor can anyone related to you or anyone who has acted as your agent in the previous two years.

Using a disqualified intermediary will jeopardize your 1031 exchange. Isn’t that too big a risk for you to bear?

How to choose a qualified intermediary.

Since the qualified intermediary will be dealing with a huge sum of money, it is important to contact reliable sources when prospecting for a qualified intermediary.

A credible source you can check is the Federation of Exchange Accommodators (FEA). The FEA offers a qualified intermediary certification program. The body also keeps a directory of its members that are Certified Exchange Specialists. To be FEA certified, QIs must:

• Have at least three years of equivalent full-time work experience at a qualified intermediary company.
• Receive a minimum of 20 hours of continued education every two years.