1031 Tax Deferred Exchange: SIMULTANEOUS
Is a Professional Qualified Intermediary Required?
Many real estate professionals advise their clients that a professional qualified intermediary is not required if they close their purchase and sale concurrently. This is true, PROVIDED, the two owners of property want each other’s property and/or one of the “cooperating” parties agrees to acquire FEE TITLE in the exchange property!
BASIC CRITERIA
To qualify for non-recognition of gain, some basic criteria must be met:
There must be a trade between two parties.
The Investor’s access to the proceeds from the sale must be restricted via a written exchange agreement.
The accommodating party must acquire (from the Investor) and transfer (to the buyer) the relinquished property, and acquire (from the seller) and transfer (to the Investor) the replacement property
This could be done by the buyer or seller of one of the properties involved in the exchange, or it could be a professional Qualified Intermediary. In either event, both (“accommodators”) are subject to the same regulations.
Options
There are two options to create a trade between two parties:
Sequential Deeding. The accommodating party acquires and transfers each property by going through the chain of title via sequential deeding. (Few professional qualified intermediaries are willing to accept this liability, rarely would an individual who just wants to buy or sell a property be willing to accept this risk.)
Direct Deeding. The potential liability of sequential deeding can be avoided by using direct deeding, provided the accommodating party::
Acquires and transfers the relinquished property via an assignment of the purchase contract; and Acquires and transfers the replacement property via an assignment of the purchase contract; and enters into an exchange agreement to perform specific duties and to restrict the Investor’s access to the sale proceeds in order for the exchange to qualify for tax deferral.(This is the documentation the professional qualified intermediary provides, as well as security of the exchange proceeds in the event the closing does not occur simultaneously.)
The Professional Qualified Intermediary
In agreeing to cooperate with an investor planning to do an exchange, rarely is the cooperative party prepared to assume the liability of going through the chain of title on unfamiliar property, nor are they qualified to prepare assignments and exchange agreements to comply with the regulations. Also, these are specialized documents that cannot be prepared by the escrow or settlement agent, unless they have a division that is a Qualified Intermediary.
Trade Offs
Advantages:
The advantages of using a professional qualified intermediary are numerous:
The potential liability for the structure of the exchange (i.e. tax consequence) is greatly reduced for all parties (closer, broker, buyer or seller).
All principals (buyer, seller and investor) are shielded from accepting additional liability.
Provides a defensible paper trail via the assignments and exchange agreement in the event of an audit
Liabilities:
Generally an Investor or his broker are hoping to save the qualified intermediary fee by structuring the exchange without a professional. However, those fees could be lost due to added paperwork required by the closer (who is probably not experienced nor expected to know all the exchange variables). The investor’s potential loss of tax deferral status could result in his being hit with a large tax bill AFTER the proceeds from the sale have been spent. In that event, the real estate advisor could face potential liability by not using a professional qualified intermediary! All this rarely makes the savings of a qualified intermediary’s fee worth while.
The taxpayer is advised to seek the advice of a CPA and/or tax consultant regarding the identification period, exchange period and manner of identification. Compliance with the rules and regulations contained in IRC 1031 is the sole responsibility of the taxpayer.