Qualified Intermediaries Play Vital Roles In Like Exchanges

2007-04-12 11:34:06

( Business )



Section 1031 of the tax code helps US taxpayers avoid legitimately the tax liability on exchanges of property. It only applies to like-kind exchange transactions such as a real estate to another real estate, or a vehicle to another vehicle. In any kind of these transactions, it is the qualified intermediaries who facilitate the exchanges.

For qualified intermediaries to qualify as facilitators in like-kind exchange, they must not be among the disqualified persons enumerated in the IRS regulation. Your agent like your accountant, attorney, employee, or investment banker or broker at the time of the transaction will not qualify to be appointed as an accommodator or qualified intermediary. You cannot also make your relatives as your qualified intermediaries.

When you engage the qualified intermediaries' services, you are considered to have no actual or constructive receipt of the funds. You should enter into a written agreement with a qualified intermediary so you have a proof and the IRS will treat the transaction as like-kind exchange. The proceeds of the sale of your relinquished property will then be eligible for tax deferment status. This means that when you will ultimately sell the replacement property, whatever gain you acquire from the sale of the relinquished property will still be subject to capital gains tax.

The reason for the deferment of tax is that when you reinvest in another like-kind property using the proceeds, you do not actually realize any economic gain. Although you acquire a new property, the fact is your investment remains with the same kind of property and whatever gain there is, it is only a paper gain.

To anticipate a scenario where qualified intermediaries may commit any omissions or errors, they are required to post a bond and purchase insurance. Knowledge or educational background in finance, tax or law is an advantage if you want to be a qualified intermediary.


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