<p>Most savvy investors understand the importance of a sound tax strategy when making an investment decision. Therefore, it is no wonder that utilizing a like-kind exchange (LKE) when buying or selling real estate, or other business use assets, remains a primary wealth and tax strategy amongst investors both large and small. &nbsp;Unfortunately, many investors are blindly allocating the responsibility of managing their 1031 exchange to a local attorney, CPA, or banker.</p>

<p>So why could this be a mistake? Think of it like this; would you go to a local commercial real estate broker and ask them for advice on purchasing your next home? Probably not, because while they know and understand the market and real estate, they don’t know the residential market. A commercial broker will not have any familiarity of all the critical issues related to residential transactions - issues like what neighborhoods are booming, ideal size and floorplan for certain size of family, what areas have strong school districts, proximity to public transportation, etc. &nbsp;</p>

<p>Similarly, if you are looking to utilize a tax strategy like a 1031 exchange that needs to follow very strict set of guidelines why put your money in the hands of someone who may not understand its intricacies. Here are a few of the numerous reasons for engaging a qualified intermediary (QI) when conducting a 1031 exchange:</p>

<ol>
<li>A qualified intermediary’s involvement with the Federation of Exchange Accommodators (FEA), the industry trade association for QIs, keeps them up-to-date on issues that may impact your exchange.</li>
<li>The FEA recommends that QIs hold a Fidelity Bond and Errors &amp; Omission Insurance.</li>
<li>Many states have specific regulatory requirements targeting LKEs, and QIs are up-to-date on all state requirements.</li>
<li>QIs will utilize segregated commercial accounts, qualified trust accounts and/or escrow accounts, offering multiple security measures to safeguard the taxpayer’s funds.</li>
<li>Sophisticated QIs will have the capability to understand, handle, and process all kinds of exchanges, including forward, reverse, built-to-suit, and improvement exchanges.</li>
</ol>

<p>The above list indicates many great reasons to use an experienced QI for a 1031 exchange. However, not all QIs are created equal, and it’s important that, when setting out to conduct a 1031 exchange, one exercises due diligence in researching your qualified intermediary. The above list can provide pertinent questions to ask during the process.</p>

<p>There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.</p>

<p>To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties<span style="color:#ff0000;"> </span>who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:</p>

<ol>
<li>Related Parties – Including certain family members and business entities with shared/common ownership.</li>
<li>Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.</li>
</ol>

<p>Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.</p>

<p>I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.</p>

<p>While it's true that any third party can legally provide the service outlined above, they'll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service's safe harbor guidelines. I inquired further:</p>

<ul>
<li>Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.</li>
<li>Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?</li>
<li>Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?</li>
<li>Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?</li>
<li>Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?</li>
<li>Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?</li>
<li>Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?</li>
</ul>

<p>When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.&nbsp; “All we did was hold the money and then forward it to the seller when it came time to buy.”</p>

<p>Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.</p>
<a href="https://info.accruit.com/start-an-exchange"&gt;
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<p>There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.</p>

<p>To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties<span style="color:#ff0000;"> </span>who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:</p>

<ol>
<li>Related Parties – Including certain family members and business entities with shared/common ownership.</li>
<li>Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.</li>
</ol>

<p>Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.</p>

<p>I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.</p>

<p>While it's true that any third party can legally provide the service outlined above, they'll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service's safe harbor guidelines. I inquired further:</p>

<ul>
<li>Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.</li>
<li>Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?</li>
<li>Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?</li>
<li>Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?</li>
<li>Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?</li>
<li>Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?</li>
<li>Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?</li>
</ul>

<p>When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.&nbsp; “All we did was hold the money and then forward it to the seller when it came time to buy.”</p>

<p>Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.</p>
<a href="https://info.accruit.com/start-an-exchange"&gt;
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<p>&nbsp;</p>

<h2>Call in Advance</h2>

<p>Taxpayers often lose opportunities for 1031 tax deferred exchanges simply by not being informed and planning ahead.&nbsp; We frequently receive calls from a taxpayers who have already sold the relinquished property and would now like to exchange it for a replacement property.&nbsp; Often they still hold the proceeds check and have not deposited it, erroneously thinking that depositing the funds would be the factor that would invalidate an exchange.&nbsp; Unfortunately for several reasons, it's too late to enable the taxpayer to complete the exchange.</p>

<p>First, once the title company issues a check made out to the taxpayer, that person is in "actual receipt" of the funds.&nbsp; The <a href="/exchange-library/internal-revenue-service-regulations-irc-%C2%A71031">IRS regulations</a> provide any attempt at an exchange is not valid if the taxpayer has any "rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property" pertaining to the sale proceeds.&nbsp; So the error of failing to contact the exchange company until immediately after the sale of the relinquished property would disqualify any exchange attempt.&nbsp;</p>

<p>Even if the taxpayer were to return the check to the title company in exchange for a check made payable to the qualified intermediary, the taxpayer still could not qualify for an exchange.&nbsp; Under the regulations, the taxpayer needs to assign certain contract rights that he or she has under the relinquished property contract to the qualified intermediary no later than the day of closing.&nbsp; Further, the notice of this assignment is also required to be given to the relinquished property buyer.&nbsp; Failure by the taxpayer to assign the contract rights and notify the buyer of that assignment on a timely basis would, by itself, prevent any attempt at a deferred exchange.</p>

<h2>Reverse Exchanges</h2>

<p>These delays in getting the exchange company involved often take place in connection with <a href="/blog/are-1031-reverse-tax-deferred-exchanges-real-estate-approved-irs">reverse exchanges</a>. &nbsp;A reverse exchange occurs when the taxpayer needs to close on the acquisition of the replacement property prior to the disposition of the relinquished property.&nbsp; This is sometimes referred to as a pure reverse exchange.&nbsp; The IRS does not recognize the validity of a pure reverse exchange.&nbsp; Had a taxpayer facing the acquisition of the new property before the sale of the old property called the exchange company prior to the acquisition of the new property, it would have been fairly simple to structure the transaction to qualify for tax deferral.&nbsp; This would involve the exchange company taking title to the new property on the date of closing and holding it for the benefit of the taxpayer until immediately after the sale of the relinquished property.&nbsp; At that time the exchange company would transfer the property to the client. Had a phone call been made to the exchange company a few days or more before the closing on the replacement property, there would have been time to structure the transaction to fit the IRS rules.</p>

<h2>Summary</h2>

<p>In short, there are a myriad of rules and procedures that need to be adhered to in order to structure a successful deferred exchange. Section 1031 is much form over substance and there are many ways for an exchange to get tripped up.&nbsp; First and foremost of these is failure to call the qualified intermediary well before the sale transaction is to take place to make sure all necessary documents are in place and that they are signed by the necessary parties. Maintaining close contact with the exchange company, can help the taxpayer navigate the safe harbors.&nbsp;</p>

<p>^{<a href="https://www.flickr.com/photos/photoloni/&quot; target="_blank">Photo Credit: Alon</a>}</p>

<p>1031 Like-Kind Exchanges are a valuable asset for businesses’ growth and success. However, many companies seeking tax relief don’t know that there are no licensing requirements for <a href="https://www.accruit.com/about-us/how-choose-qualified-intermediary">Qua… Intermediaries</a>. The only stipulation set forth states that a QI cannot be related to or have a financial relationship with the taxpayer.</p>

<p>In 2008, a 1031 Exchange and Qualified Intermediary service provider filed for bankruptcy, which froze customers’ exchange funds in illiquid securities. Customers were forced to seek their funds in bankruptcy court where many ended up missing their specified exchange period and facing tax liabilities due to the failed exchange.</p>

<p>As the nations leading QI for LKEs involving business assets, Accruit handles over 30,000 transactions a month totaling over $7 Billion annually. We deliver the highest level of integrity and competence to assure compliance with all regulations and to safeguard the security of funds awaiting reinvestment. <a href="/contact-us" target="_blank">Contact Accruit today</a> to reinvest unnecessary taxes back into your company.</p>

<p>Read our full list of 1031 Exchange tips for <a href="/blog/1031-exchange-tips-selecting-right-qi" target="_blank">selecting the right Qualified Intermediary</a>.</p>

<p><a class="colorbox-load cboxElement" href="http://www.youtube.com/v/np0wAdEFFqY?fs=1&amp;width=640&amp;height=480&… alt="" src="/sites/default/files/files/1031%20Exchanges%20in%202%20Minutes_0.JPG" style="height:163px; margin-left:10px; margin-right:10px; width:220px; float:left" /></a></p>

<p><strong>Explaining the Power of a 1031 Like-Kind Exchange</strong><br />
<br />
Tax laws can be very complicated. Many companies don’t even realize they have the opportunity to reinvest the gains from the sale of assets back into their business. With a 1031 LKE, companies can defer unnecessary taxes and utilize the increased cash flow to purchase replacement assets of like-kind.</p>

<p>Watch this short, informative video to find out how a 1031 LKE can help you put more cash back into your business.</p>
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