Among the many professionals you’ll need to work with during a like-kind swap, the qualified intermediary (sometimes informally referred to as a custodian, accommodator, or facilitator) is among the most essential professionals involved in a like-kind exchange. Who is the custodian? While sometimes referred to as a custodian, the formal IRS term is qualified intermediary. These entities help coordinate the transaction by holding sale proceeds, preparing required documentation, and facilitating timely reinvestment.
In this article, Realized 1031 discusses in-depth the role of the 1031 exchange custodian as well as best practices when choosing one. Let’s take a closer look.
Role of the 1031 Exchange Custodian
The like-kind exchange is a complex transaction, with numerous rules that investors must follow to ensure compliance and maintain their tax-deferred status. The qualified intermediary (QI)—sometimes informally referred to as a custodian, accommodator, or facilitator. Here are some of their primary roles.
Overall Facilitation of the Exchange
Your qualified intermediary acts as the central point of coordination for the exchange. They prepare and execute required documentation, including the Exchange Agreement, Assignment Agreements, and notices to all parties involved. QIs also coordinate with taxpayers, buyers, sellers, closing agents, and attorneys to help ensure the transaction is structured in accordance with IRC §1031 and related Treasury regulations.
Holding Proceeds in Escrow
One core requirement of the 1031 exchange is that IRS rules prohibit the taxpayer from receiving or controlling the sale proceeds. The custodian plays a critical role in enforcing this by holding the proceeds in escrow or trust account. This step prevents the creation of a constructive receipt — a taxable event that may disqualify the exchange.
Monitoring IRS Deadlines and Documentation Requirements
A 1031 exchange is bound by two key deadlines: a 45-day identification window and a 180-day exchange completion period. QIs assist in monitoring these deadlines and may send reminders or confirmations to keep the process on track. While the taxpayer is ultimately responsible for meeting IRS requirements, experienced QIs help reduce the risk of timing errors or paperwork omissions that could jeopardize the exchange.
Tips for Choosing a 1031 Exchange Facilitator
Selecting a 1031 exchange is a critical part of executing a successful like-kind exchange.. IRS rules prohibit the use of anyone who is a related party or who has served as your agent (e.g., attorney, accountant, or real estate broker) within the past two years. Here are some other characteristics to consider during your vetting process.
- Experience and Track Record: Find a professional custodian or qualified intermediary company that has proven experience with such transactions. There are no licenses required to become an intermediary, so it's important to carefully evaluate your choices.
- Methods to Secure Your Proceeds: A good custodian must have methods to protect your funds and never commingle the money with their operating accounts.
- Communication and Responsiveness: A 1031 exchange involves strict deadlines. Your QI should be highly responsive, easily accessible, and provide clear, regular updates. Evaluate their communication style during your initial interactions.
Wrapping Up: Understanding the Role of the 1031 Exchange Intermediary
The 1031 exchange custodian or qualified intermediary plays a critical role in a like-kind swap. This professional facilitates key aspects of the process and helps keep the transaction aligned with IRS rules and timelines. Plus, the custodian holds the proceeds of your home sale to maintain the arm’s length transaction requirement. A well-vetted QI can support a smooth transaction and help reduce the risk of disqualification due to procedural errors.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.irs.gov/pub/irs-pdf/i8824.pdf
https://www.hellodata.ai/help-articles/1031-exchange-timeline-overview
