Qualified Intermediaries - The "QI"

Qualified Intermediaries - The "QI"

The Qualified Intermediary should be a corporation that is in the full-time business of facilitating 1031 exchanges. The role of a QI is similar to, but not identical to, the role of an escrow company. The Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary does not provide legal or specific tax advice to the exchanger, but will usually perform the following services:

• Coordinates with the exchangers and their advisors, to structure a successful exchange.
• Prepares the documentation for the Relinquished Property and the Replacement Property.
• Furnishes escrow with instructions and documents to effect the exchange.
• Secures the funds in an insured bank account until the exchange is completed.
• Provides documents to transfer Replacement Property to the exchanger, and disburse exchange proceeds to escrow.
• Holds the document of Identification of Replacement Properties sent by the Taxpayer.
• Submits a full accounting of the Exchange Funds for the Taxpayers Records.
• Submits a 1099 to the Taxpayer and the IRS for any growth proceeds paid.

Anyone who is related to the taxpayer, or who has had a financial relationship with them within the two years prior to the close of escrow of the exchange can not be used as the QI. This means that the taxpayer cannot use their current attorney, certified public accountant or real estate agent. A corporation or other entity to act as Qualified Intermediary owned by your CPA, CPA firm, real estate agent or attorney is likewise disqualified.

A Qualified Intermediary should be bonded and insured against errors and omissions and employee dishonesty. Relevant educational background such as tax, law or finance is desired. Nevada is the only state that requires a QI to be licensed.

In order to take advantage of the qualified intermediary "safe harbor" there must be a written agreement between the taxpayer and intermediary expressly limiting the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary. The intermediary can act with respect to the property as the agent of any party to the transaction and further, an intermediary is treated as entering into an agreement if the rights of a party to the agreement are assigned to the intermediary and all parties to the agreement are notified in writing of the assignment on or before the date of the relevant transfer of property. This provision allows a taxpayer to enter into an agreement for the transfer of the relinquished property (i.e., a contract of sale on the property) and thereafter to assign his rights in that agreement to the intermediary. Providing all parties to the agreement are notified in writing of the assignment on or before the date of the transfer of the relinquished property, the intermediary is treated as having entered into the agreement and, upon completion of the transfer, as having acquired and transferred the relinquished property.

The QI holds the proceeds from the sale of the relinquished property beyond the actual or constructive control of the Exchangor. The Qualified Intermediary also prepares the necessary documents to accomplish a tax deferred exchange

1031 Exchange: Why should you consider one?
Defer paying capital gains taxes.
Leverage.
A properly structured exchange can provide real estate investors with the opportunity to defer all of their capital gains taxes. By exchanging, the investor essentially receives an interest-free, no-term loan from the government.
Relief from property management. The lessee takes the responsibility to sublet and maintain the property allowing real estate buyers to avoid most of the day-to-day management headaches.
Upgrade or consolidate property.
Diversify. Own multiple properties rather than just one.
Relocation to a new area.
Differences in regional growth or income potential.
Change property types among residential, commercial, retail, etc.

If you are considering a 1031 exchange please visit http://www.1031-nnn-properties.com/ for more in depth information on 1031 exchanges or to speak with an investment specialist about acquiring triple-net properties.

Starker Exchanges Can Be Tricky
Q I have owned and rented a house down south since 1989 and plan to sell it as part of a section 1031 Starker exchange. I am seriously considering buying a beach house in Virginia, which I intend to rent during the summer months, as well as using it for 14 days or fewer during the year.

How to Initiate an Exchange
To initiate an exchange, the investor must decide that exchange must be made prior to closing of the relinquished property. The exchange agreement must be in place and delivered to all parties before the relinquished property transfer of title. There are several steps on how to initiate an exchange.

STEP ONE
First, you must find an experienced professional Qualified Intermediary to assist you with the exchange as early in the sale process as possible. In finding a Qualified Intermediary, you should consider that he/she is knowledgeable and experienced staff; the local assistance for your real estate agent, CPA and attorney; and especially the safety of your funds. You also require the Qualified Intermediary to provide fidelity bond insurance coverage.

STEP TWO
Instruct your real estate agent to include an Exchange Cooperation Clause as a supplement to the purchase and sale agreement on the relinquished property. An example of Exchange Cooperation Clause is when the buyer hereby acknowledges that it is the intent of the Seller to affect an IRC 1031 tax deferred exchange which will not delay the closing or cause additional expense to the buyer. The seller?s rights under this agreement may be assigned to Investment Property Exchange Services, Inc., a Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with the seller and Investment Property Exchange Services, Inc. in a manner necessary to complete the exchange.

STEP THREE
Contact your Qualified Intermediary as soon as possible after escrow is opened or after entering into the purchase and sale agreement and advise them of your intent to do an exchange well in advance of the closing date. The Qualified Intermediary will draft the appropriate Exchange Agreement, Assignments and Exchange Closing Instructions that must be executed prior to closing on the property being sold.

STEP FOUR
You must start searching for acceptable replacement property immediately to insure that you can meet the strict time frame for the 45-day identification period.
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Financing Properties
Mortgages for Financing Properties is a conditional conveyance of property as security for the payment of the loan or a method of using property whether it is a real or personal property for the payment of the debt. It refers to the legal device used in securing property, but it is also commonly used to refer to the debt secured by the mortgage, or the mortgage loan.

In most jurisdictions mortgages are strongly associated with loans secured on real estate rather than other property such as ships, etc. and in cases only land may be mortgaged.
Arranging a mortgage is seen as the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full value immediately.

Legal systems tend to share certain concepts but vary in terminology. In general terms, the main participants in a mortgage are creditor, the one that has legal rights to the debt secured by the mortgage and often makes a loan to the debtor of the purchase money of the property. Typically, creditors are banks, insurers or other financial institutions who make loans available for the purpose of real estate purchase. It sometimes referred to as the mortgagee or lender. In the other hand, the debtor must meet the requirements of the mortgage conditions by the creditor inorder to avoid the creditor enacting provisions of the mortgage to recover the debt. It sometimes referred to as the mortgagor, borrower, or obligor.

There are essentially two types of legal mortgage:

Mortgage by demise
The creditor becomes the owner of the mortgaged property until the loan is repaid in full known as redemption. This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition that the property will be returned on redemption.

Mortgage by legal charge
The debtor remains the legal owner of the property, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it.

To protect the lender, a mortgage by legal charge is usually recorded in a public register. Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority.
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About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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