The IRS requires investment property owners planning a 1031 exchange to engage the services of a Qualified Intermediary (also called accommodator) throughout the exchange process. A Qualified Intermediary is a person with the training and experience necessary to handle all the facilitative and administrative aspects of your 1031 exchange transaction. You can find out more about 1031 exchange regulations here.
1031 Exchanges That Do Not Require an Accommodator
There are two exceptions where exchangers can proceed with the 1031 exchange without a Qualified Intermediary. Exchanges where the transactions are completed within a day and where one property is directly exchanged for another (simultaneous exchange) are exempt from the legal requirement to engage a Qualified Intermediary. Hiring an accommodator is highly advisable for investors who are unwilling to risk having their 1031 exchange invalidated. These kinds of 1031 exchanges are pretty rare.
1031 Exchanges That Require an Accommodator
The Department of Treasury Regulations (Section 1.1031) makes a Qualified Intermediary mandatory for delayed 1031 exchanges. Delayed 1031 exchanges are the most common kind. Usually, the 1031 exchange occurs over an extended period (about 180 days) because it involves a series of complex transactions. Usually, when the exchanger relinquishes their investment property to the buyer, it may take them some time to identify the property they wish to acquire in exchange. The IRS requires such 1031 exchanges to be overseen by an accommodator.
Who is Legally Barred From Acting as an Accommodator?
The law prevents a conflict of interest by preventing certain people from acting as accommodators. You cannot act as your own accommodator, nor can you hire anyone related to you or with whom you have had a financial relationship within two years before the close of escrow of the 1031 exchange.
As a result, you cannot hire your current attorneys, real estate agents or certified public accountants. A 1031 accommodator carries out a lot of sensitive functions. Some states exercise other restrictions that ensure all accommodators are working within the confines of the law through licensing.
Why You Need a Qualified Intermediary For Your 1031 Exchange
Even though an accommodator is not legally required for some 1031 exchanges, it is advisable to hire one anyway. 1031 exchanges are notoriously complicated and can be invalidated for failing to adhere to the IRS’s strict procedural requirements. Inventors should be extremely diligent when choosing a Qualified Intermediary. Ensure you inquire about their qualifications, experience and whether they are licensed and insured.
The right Qualified Intermediary will need to be up to par with all new legal developments to provide efficient advice and guidance. Once you choose the right accommodator, you do not have to worry about the risk of having your 1031 exchange disqualified. There are several mistakes or oversights that can end up costing you a large amount in capital gains tax should the 1031 exchange not succeed.
Accommodators Ensure Legal Compliance
We have already highlighted the importance of complying with all the legal requirements for 1031 exchanges. Your accommodator is tasked with the role of ensuring that your 1031 exchange complies with applicable laws and codes. Your accommodator will worry about the legal obstacles, so you do not have to.
Accommodator Holds 1031 Exchange Funds in Escrow
Once you sell the investment property you intend to exchange, you cannot receive the proceeds from the sale. Instead, your accommodator receives, holds and safeguards the funds to protect you from constructive receipt, which could invalidate your 1031 exchange. After you identify the building you would like to acquire in the exchange, the accommodator will transfer the payment to the seller and facilitate the transfer of title to you. Any interest earned by funds held in escrow is to be given to the exchanger, accommodator or a combination of both.
Accommodators Guarantee Correct Documentation
Your accommodator will also perform the vital task of ensuring that the 1031 exchange is structured correctly and all documentation is in order. The 1031 exchange process has stringent timelines and procedural requirements that must be strongly adhered to. Failure to observe all legal requirements exposes you to serious tax liabilities should the 1031 exchange be disqualified.
1031 exchanges are an incredible investment tool that will help you preserve and build your wealth. They will allow you to defer depreciation recapture and capital gain taxes on an investment property. The 1031 exchange is also a great way to trade up or add properties to your portfolio. Hiring the right accommodator specializing in 1031 exchange properties is the best way to ensure a successful 1031 exchange.