Dear Tax Talk,
I want to do a like-kind (1031) exchange of property and had hoped to use my attorney to do the deferred exchange. He tells me he can't, as it is against IRS rules to use your attorney. Why can't I use someone I trust to do the like-kind exchange? With all the scammers out there, I'm leery of trusting my property to someone I don't know.
Under the like-kind exchange rules you need a person (entity) to act as the accommodator of the 1031 exchange. That person will receive the proceeds from the property you relinquish in the exchange.
The accommodator will then use the proceeds to acquire the replacement property you identify and transfer the title to your name. Obviously, because that person will have control over your money, you'd like to be sure that the funds won't be diverted and that you end up with the replacement property.
The accommodator of the transaction is known in tax parlance as the qualified intermediary, or QI. The term "qualified" here is used to distinguish from "disqualified" and does not mean that the accommodator is licensed or regulated in any way by the Internal Revenue Service or state agency.
A disqualified intermediary would be your attorney, accountant, banker, real estate agent or relative. (The term QI also applies to certain withholding agents in international tax transactions, so an Internet search should indicate that you're looking for a Section 1031 QI.)
Because this is a largely unregulated industry, you need to know who you're getting in business with. Do your homework to find out about the QI. As the story, "Is your qualified intermediary a thief?" points out, not all QIs are honest.
Some of the things you should do include:
- Obtain references from your trusted sources.
- Obtain a banking reference.
- Verify if bonded or insured and obtain a certificate of coverage.
- Ensure that your signature is required for funds disbursements from a bank.
- Check professional affiliations.
Before you would trust a broker or a bank with your money you would do some homework, and you need to do the same with an accommodator.
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