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Qualified Intermediaries and Exchange Accomodation Titleholder |
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Exchangers should enlist the help of two qualified individuals when they want to complete a §1031 Exchange: a Qualified Intermediary (QI) and an Exchange Accommodation Titleholder (EAT).
Qualified Intermediary The Qualified Intermediary (QI) is a person or company who works for a fee and facilitates the Like-Kind Exchange by entering into a written agreement with the Exchanger for the exchange of properties. An Exchanger cannot be his own qualified intermediary, nor can a person who has acted as the Exchanger’s employee, attorney, accountant, investment banker or broker, or real estate agent within the last two years.
Services of a Qualified Intermediary
Facilitate the exchange Coordinate with the Exchanger (and his advisors) to structure a successful exchange Prepare the legal documentation for the Replacement Property and the Replacement Property Furnish escrow with instructions to effect the change Secure the funds from the exchange until the transfer is completed Provide the documents needed to transfer the Replacement Property to the Exchanger and disbursing the proceeds to escrow Handle all funds during the exchange of property; if the Exchanger or an agent not the QI handles the funds, the proceeds become taxable Create the exchange of properties The QI also enters into a written contractual agreement with the Exchanger as a safe harbor (a person who holds the proceeds) during a Like-Kind Exchange. This permits the Exchanger to sell his Relinquished Property, acquire a Replacement Property, and avoid a constructive receipt or an invalid exchange.
Exchange Accommodation Titleholder The Exchange Accommodation Titleholder (EAT) works with the Exchanger during a Reverse §1031 Exchange. While the QI facilitates a Like-Kind Exchange, the EAT acquires and holds the title (Qualified Incidia of Ownership) on behalf of the Exchanger. This is an especially important role in a Reverse Exchange. The EAT and the Exchanger must also execute a written agreement called a Qualified Exchange Accommodation Agreement (QEAA) which will contain the following specifications: The EAT holds the property for the Exchanger’s benefit The EAT and the Exchanger agree to report the acquisitions, holding,and disposition on each of their income tax returns The EAT is treated as the beneficial owner for federal and state income tax purposes
Options for Using an Installment Note during a Property Exchange
The QI must receive the installment notes if such a procedure is going to be used during the transfer. If an installment note is used in a transfer, the Exchanger has four options on how to use it to buy a Replacement Property. Option 1: Trade the note to the seller of the Replacement Property for consideration for purchase of new property. Option 2: Instruct the QI to sell the note on the open market and add the amount realized to the exchange proceeds. The Exchanger will then receive cash to negotiate the purchase of the Replacement Property. This option is not used as often because a discount may need to be added in order to sell the note. Option 3: Allow the QI to sell the note to a party related to the Exchanger (for example, a closely held corporation or a relative). Option 4: Wait until the end of the exchange and receive the installment note back from the QI. The note then becomes boot and is taxable. Interest on this note is also taxable, and the rules under §453 come into effect.
Documents an EAT Must Receive Before a Reverse Exchange can take place Financial statements or tax returns from the last two years Grant deed for the Relinquished Property Information providing proof of property, casualty, and liability insurance, and also naming the LLC as the insured and the EAT and Exchanger as additional insureds Phase 1 Environmental Assessment report issued within the last six months; the report must indicate that the property is free of contamination and be certified to the EAT (commercial and industrial real property and vacant land) Title insurance information naming the EAT as the insured
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Required Professionals 