What is the Difference Between a 1031 Exchange Facilitator and a Qualified Intermediary?

If you are planning on conducting a like-kind exchange, do you need a 1031 exchange facilitator? Do you need a qualified intermediary? Do you need both? What’s the difference?

These are some of the most common questions we receive from business owners and investors who are preparing to navigate the like-kind exchange process for the first time. Like-kind exchanges are confusing, and there is a lot of unfamiliar terminology and procedures involved. A 1031 exchange facilitator (or qualified intermediary) can help—and working with one of these professionals can also help to streamline the process or open up alternatives to a traditional 1031 exchange that might be better suited to your specific circumstances.

1031 Exchange Facilitator or Qualified Intermediary?

So, what do you need to know about hiring a 1031 exchange facilitator or qualified intermediary? The first thing you need to know is that these terms are typically used interchangeably. While there are technically some differences (the IRS considers a qualified intermediary to be a type of 1031 exchange facilitator), qualified intermediaries and other 1031 exchange facilities typically offer the same types of services. These services include:

• Managing the sale of the “relinquished” property and acquisition of the “replacement” property so that they count as a single transaction (or like-kind exchange) for federal tax purposes;
• Holding the proceeds from the sale of a relinquished property so that they can be reinvested in compliance with Section 1031;
• Advising on transaction-related issues, such as timing considerations and the receipt (and taxability) of “boot,” before and during the process;
• Calculating your basis in the replacement property for purposes of accurately reporting the transaction to the IRS and addressing any and all tax-related considerations;
• Assisting with conducting a delayed, reverse or improvement exchange in compliance with Section 1031—which would otherwise not be possible.

Due to the complexity of the 1031 exchange process, most business owners and investors who regularly conduct these transactions work with a 1031 exchange facilitator or qualified intermediary on an ongoing basis. If this is your first time conducting a 1031 exchange, we strongly recommend working with a professional to ensure that you do not inadvertently trigger substantial federal (and state) income tax liability. Additionally, as mentioned above, working with a facilitator or qualified intermediary is necessary in some (and, in fact, in most) cases, and if you need a facilitator or qualified intermediary to complete your exchange, you will want to get them involved as early in the process as possible.

The Primary Role of a 1031 Exchange Facilitator or Qualified Intermediary

While there are a variety of ways a 1031 exchange facilitator or qualified intermediary can help, there is one primary—and critical—role that a facilitator or qualified intermediary plays during the 1031 exchange process. This ensures that your receipt of funds from the sale of your relinquished property does not render you ineligible for indefinite tax deferral under Section 1031. As the IRS explains:

“It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable. . . . One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.”

If you receive the proceeds of your sale directly and then reinvestment in another property, you are not conducting an “exchange,” as this term is used in Section 1031. Instead, from the IRS’s perspective, you are simply selling one property and buying another. This means that the sale of your relinquished property will immediately trigger tax liability on any gain you recognize from the transaction—even if you subsequently use the proceeds (or the remaining after-tax proceeds) for your next real estate investment.

What about working with your real estate agent or attorney to conduct a 1031 exchange? As the IRS makes clear, “your agent (including your real estate agent or broker, investment banker or broker, accountant, [or] attorney . . . ) cannot act as your facilitator.” To learn some more important considerations for choosing a facilitator or qualified intermediary, you can read How To Choose A Qualified 1031 Exchange Facilitator.

Speak with a 1031 Exchange Facilitator (Qualified Intermediary) Today

At 1031 National Services, we provide comprehensive and custom-tailored 1031 exchange facilitation services, including serving as a qualified intermediary. To speak with a member of our team about your transaction in confidence, please call 888-872-1031 or request a free consultation online today.