In a 1031 exchange, the investor typically works with a qualified intermediary (QI), also known as a facilitator, who acts as a neutral third party to facilitate the exchange. The QI plays a crucial role in the exchange process, as they hold the proceeds from the sale of the relinquished property and facilitate the purchase of the replacement property.
Once the investor sells their relinquished property, the QI holds the proceeds from the sale in an escrow account until the purchase of the replacement property is completed. If the investor were to receive the proceeds from the sale of the relinquished property directly, the exchange would no longer qualify for potential tax-deferred treatment.
The QI then uses the proceeds from the sale of the relinquished property to purchase the replacement property on behalf of the investor. The QI acts as a middleman between the buyer of the replacement property and the investor, and ensures that all exchange requirements are met.
Once the replacement property is acquired, the QI transfers the title of the replacement property to the investor, and the exchange is complete. At this point, the investor holds the replacement property and the proceeds from the sale of the relinquished property are no longer in escrow with the QI.
The QI doesn’t have any control over the proceeds from the sale of the relinquished property, and can only use the funds to purchase the replacement property on behalf of the investor. The QI cannot provide any advice or guidance on the investment of the funds because they are strictly acting as a facilitator for the exchange.
The QI holds the proceeds from the sales of the relinquished party in a 1031 exchange until the purchase of the replacement property is complete. The QI ensures the exchange funds are used properly and the investor receives the potential tax benefits of the exchange. Investors should work closely with their QI to ensure a smooth exchange process and compliance with all exchange requirements.