The Role of the Qualified Intermediary ("Accommodator")

The use of a professional, experienced, institutional Qualified Intermediary, such as Exeter 1031 Exchange Services, LLC, is critical in the structuring and completion of a successful 1031 exchange transaction.  The Qualified Intermediary, often referred to in the real estate industry as an Exchange Accommodator or Exchange Facilitator, is authorized under Section 1.1031 of the Department of the Treasury Regulations and is the central component in a tax-deferred like-kind exchange transaction.

You need to know that Qualified Intermediaries are not licensed, regulated, audited or otherwise monitored by any governmental agency, and Qualified Intermediaries are not required to be bonded, insured or maintain any other form of minimum equity capitalization.  You need to exercise significant care when choosing your Qualified Intermediary because of the crucial role it will play in administering your tax-deferred like-kind exchange.  You should review the Web page entitled Choosing a SAFE Qualified Intermediary, which was written to assist you in the careful evaluation, analysis and selection process of Qualified Intermediaries.

A Qualified Intermediary is responsible for a number of important elements in the administration of a successful tax-deferred like-kind exchange transaction, including (1) preparing the tax-deferred like-kind exchange agreements and related transactional documents in order to properly structure the tax-deferred like-kind exchange transaction; and (2) receiving, holding and safeguarding your tax-deferred like-kind exchange funds throughout the transaction; and (3) advising or consulting with you and your professional advisors regarding the implementation of your tax-deferred like-kind exchange transaction to ensure compliance with all applicable Internal Revenue Codes, Department of the Treasury Regulations and related Revenue Rulings and Revenue Procedures.

Preparation of Legal Documentation

The drafting of the tax-deferred like-kind exchange agreements and related transactional documents is crucial in the proper structuring of a successful tax-deferred like-kind exchange transaction.  A single mistake in the preparation of the legal documentation could result in the disallowance of your tax-deferred like-kind exchange transaction by the Internal Revenue Service, and the subsequent recognition by you of the depreciation recapture and capital gain income tax liabilities along with interest and penalty assessments by the Service.

The Qualified Intermediary must possess the necessary experience and expertise to ensure a thorough review of the related transactional documents and a complete understanding of your tax-deferred like-kind exchange transaction.  This in depth understanding of your transaction by the Qualified Intermediary will ensure the tax-deferred like-kind exchange agreements and related documents will be completed accurately.

Holding and Safeguarding 1031 Exchange Funds

Another important responsibility that is arguably just as critical as the rest is the Qualified Intermediary’s fiduciary duty of receiving, holding and safeguarding your tax-deferred like-kind exchange funds.  Qualified Intermediaries hold your tax-deferred like-kind exchange funds in order to prevent constructive receipt of the funds by you. 

Qualified Intermediaries hold significant amounts of tax-deferred like-kind exchange funds on behalf of thousands of Investors just like you and therefore have a tremendous fiduciary responsibility to protect the funds under its custody.

Technical Ability: Providing Guidance

Perhaps the most frustrating element for Investors is preparing and planning for a tax-deferred like-kind exchange.  You have probably spoken to one Qualified Intermediary and received one answer and then spoken to another and received a completely different answer.  Then consulted with your legal, tax and financial advisors and received three more completely different answers. 

The tax-deferred like-kind exchange industry has many gray areas because there are many unanswered questions in Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations, which explains why you may often receive so many different answers (which really represent opinions and not true answers).

Therefore, perhaps the most important role of all is for the Qualified Intermediary to ensure that its 1031 exchange specialists are sufficiently trained and have sufficient experience and expertise in order to provide the necessary guidance and advisory services to help guide you through the confusing tax-deferred like-kind exchange arena.

Disqualified Persons Can Not Act as a Qualified Intermediary

Certain persons are specifically prohibited from serving as your Qualified Intermediary. The Qualified Intermediary cannot be the Investor, an agent of the Investor or an otherwise disqualified person under Section 267(b) and 707(b) of the Internal Revenue Code.

Further, although an individual may serve as a Qualified Intermediary, it is not recommended because the death, divorce or bankruptcy of the individual may have a catastrophic effect on your tax-deferred like-kind exchange transaction and/or otherwise compromise the tax-deferred like-kind exchange funds.

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