Qualified Intermediary Provides Safe Harbor Protection

2007-04-12 11:34:06

( Business )



If you sell your property for the sole purpose of buying another property of the same kind, you will have to pay for the capital gains tax. You can legally avoid payment of the capital gains tax by taking advantage of the like-kind exchange provision under section 1031 of the tax code.

In a like-kind property exchange transaction, there are four parties involved: you (the exchanger), the buyer of the relinquished property, the seller of the replacement property, and a qualified intermediary. Qualified intermediaries are those to whom you execute the 1031 exchange, and who provide you, for a fee, a safe harbor protection under the tax code.

Sale of Relinquished Property

You must execute a written contract to sell your property to a buyer. Another legal document assigning your rights in the sales contract to a qualified intermediary must also be executed. When the sale is closed, the contract passes from you to the buyer as if it is a typical sale. However, the purchase proceeds will not be given to you, but to the qualified intermediary.

Purchase of Replacement Property

After the sale of the relinquished property has been closed, you will have a maximum of 180 days within which to purchase a replacement property. And also after the closing, you have a 45-day deadline to give a list of replacement property to the qualified intermediary. Once the seller of the replacement property agrees to the purchase price, you will then proceed to enter into a contract with the seller.

And, similar to the process in the sale of the relinquished property, you will again assign your rights in the purchase contract to the qualified intermediary. The qualified intermediary pays the purchase price to the seller of the replacement property. And finally, the seller will transfer the title on the property directly to you.


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