If you are a real estate investor looking to sell your property and reinvest the proceeds into another property without incurring taxation, then you might be interested in the 1031 exchange program. This program allows you to defer your capital gains taxes if you meet certain requirements, one of which is hiring a qualified intermediary to act as a facilitator for the exchange. In this article, we will go over the 1031 qualified intermediary agreement and what it entails.

What is a Qualified Intermediary?

A qualified intermediary (QI) is a third-party facilitator who assists in the exchange of real property under Section 1031 of the Internal Revenue Code. The QI holds the proceeds of the sale until they are reinvested into the replacement property. The QI must be an independent party who has not acted as the taxpayer’s agent within the two years preceding the exchange. The QI’s role is to ensure that the exchange meets all the requirements of section 1031 and that the taxpayer does not take actual or constructive receipt of the proceeds from the sale.

What is a 1031 Qualified Intermediary Agreement?

The 1031 qualified intermediary agreement is a legal document that outlines the terms and conditions between the taxpayer and the QI regarding the facilitation of the exchange. The agreement should be drafted by a qualified attorney who is familiar with the 1031 exchange process and the requirements of the Internal Revenue Code. The agreement should include the following provisions:

Identification of the Properties: The agreement should identify the relinquished property and the replacement property. It should also include the purchase price and other relevant information related to the properties.

Facilitation of the Exchange: The agreement should outline the duties of the QI, which include holding the proceeds in a separate account, preparing necessary documentation, and facilitating the exchange.

Fees and Expenses: The agreement should specify the fees and expenses that the QI will charge for their services. These fees are typically a percentage of the sale price and may include additional expenses such as wire transfer fees, closing costs, and document preparation fees.

Liability and Indemnification: The agreement should detail the liability of the QI in case of any errors or omissions. It should also include provisions for indemnification of the QI by the taxpayer.

Conclusion

The 1031 qualified intermediary agreement is an important document that defines the terms and conditions of the exchange of real property under Section 1031 of the Internal Revenue Code. The agreement should be drafted by a qualified attorney and should include provisions related to the identification of the properties, facilitation of the exchange, fees and expenses, and liability and indemnification. Finding a reputable QI is crucial to the success of the exchange, and the agreement provides a legal framework that protects both parties involved in the transaction.