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A 1031 exchange can be a powerful addition to your investment strategy, with the potential to defer capital gains taxes. However, as with any powerful tool, investors must use it with care and precision. The IRS has strict guidelines for structuring a real estate transaction using a 1031 exchange, and taxpayers must adhere to these rules to avoid any issues. A Qualified Intermediary (QI), also known as an Exchange Accommodator, is a vital player in executing a successful 1031 exchange, which is required by the IRS.
-Managing paperwork, including identifying potential replacement properties and recording the use of funds from the sale.
-Holding the sale proceeds in escrow, ensuring the taxpayer does not have access to these funds during the exchange process and facilitating the purchase of the replacement property using those funds.
It is important that the Qualified Intermediary is carefully chosen and the exchange follows all rules precisely to avoid issues with the IRS. The QI should be independent of the taxpayer, cannot be related to the taxpayer, and should have a good track record of successful exchanges.
The IRS has outlined the specific individuals or entities that cannot act as Qualified Intermediaries (QI) in a 1031 exchange, such as the taxpayer, any related parties, or an agent of the taxpayer. However, it does not have any requirements for the qualifications or characteristics a QI should have.
QIs are not regulated by the government but they may belong to the Federation of Exchange Accommodators.
When looking for a QI, it is important to consider their experience in conducting 1031 exchanges, asking specific questions about their track record of successful exchanges, and inquiring about their internal controls and how they handle client funds.
It is also important to remember that certain companies like title companies may act as a QI, as long as they meet the IRS guideline and are not disqualified.
It is generally acceptable to use a title company as a Qualified Intermediary (QI) for a 1031 exchange. Title companies are typically experienced and knowledgeable in real estate transactions, and therefore well-equipped to complete the exchange process successfully.
One of the main reasons why title companies may be chosen as a QI is because they often hold purchase funds in escrow, which is also a necessary step for a 1031 exchange. This means that the title company would already have the necessary infrastructure in place to hold and manage the proceeds from the sale of the original property, and subsequently disburse those funds to purchase the replacement property.
Title companies also have knowledge in clearing access to the title and in completing the required forms for the IRS. They have experience in dealing with legal and regulatory requirements for property transactions and thus have the understanding of the rules and procedures required in a 1031 exchange.
It is important to remember that for a 1031 exchange to succeed, the QI must ensure that all the rules and regulations are met including the timelines, identification rules, and completion and transmission of necessary forms. It is also crucial that the title company is independent of the taxpayer, not related to the taxpayer and should have a good track record of successful exchanges. It is also recommendable to inquire about the QI's internal controls and how client funds are held and handled.
Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure:
No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood, and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward-looking statements are never an assurance of future results.
Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read, and understand all the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.
Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.
NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by Perch Financial LLC, Emerson Equity LLC, or any affiliate, or partner thereof. Perch Financial LLC does not warrant the accuracy or completeness of the information contained herein.
