The use of a Qualified Intermediary (QI) is essential to completing a successful Starker 1031 tax-deferred exchange. When choosing a bona fide Qualified Intermediary, the two most critical factors for evaluation are the competency of staff and the security and safety of exchange funds.
A QI performs several vital functions in an exchange and operates under the “safe harbor” rules set out in regulations 1.1031(k)-1(g)(4). Although the process of completing an exchange is relatively simple, the rules are complicated and are a potential minefield. QI’s should have a significant reputation for Qualified Intermediary services with substantial exchange experience and a fundamental commitment to NNN net lease client interest. A QI should work closely with all parties involved in a NNN (NNN net lease) investment property transaction to ensure a smooth and hassle-free1031 exchange.
The Proper Preparation of 1031 Exchange Documents
Proper and timely documentation is necessary for a successful 1031 exchange (1031 NNN investment property). The Qualified Intermediary, will prepare and provide a Notices of Assignment, Assignments of Purchase and Sale Agreements, the all-important Exchange Agreement, to each of the parties, buyer and seller, and provide a blank Replacement Property Identification Notice, amongst a multitude of other form documents.
Escrow of 1031 Exchange Funds
The Exchanger is prohibited from having actual or constructive receipt of the proceeds from the sale of the Relinquished Property (exchange funds), or the ability to pledge, borrow or otherwise obtain the benefits of the exchange funds during the exchange or those proceeds will be deemed taxable as boot, per DOT Reg. 1.1031(k)-1(g)(6). The Qualified Intermediary will hold the exchange funds in escrow, in a separate bank account for the benefit of the Exchanger until the funds are used to purchase the Exchanger’s Replacement Property
Managing the Exchange Mechanism of 1031 Properties
The IRS stipulates that a reciprocal trade or actual exchange must take place in each exchange transaction. This means the Exchanger must assign to the Qualified Intermediary:
(a) interest as buyer of the Replacement Property and,
(b) interest as seller of the Relinquished Property
Because the Qualified Intermediary becomes an actual principal in the transaction, a reciprocal trade is created, even when the Exchanger is purchasing the Replacement Property from someone other than the buyer of their Relinquished Property. It is not necessary for the Qualified Intermediary to be in the chain of title. However, for 1031 purposes, the Qualified Intermediary is treated as acquiring the Relinquished and Replacement Properties when the Exchanger assigns their rights in the respective purchase and sale contracts to the Qualified Intermediary.
Bona Fide “Qualified” Intermediary
A person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two year period preceding the date of the transfer of the Relinquished Property by the Exchanger is treated as an agent of the Exchanger and is specifically disqualified from being a Qualified Intermediary.
(1031 Exchange Documents) (NNN Brokers)
1031 Exchanges are a complicated thing and not for the faint-hearted. In your quest for all manner of pertinent advisors and a Qualified Intermediary, call on the expert NNN Brokers at Triple Net Investment Group to obtain the appropriate type of NNN property for your 1031 transaction.
