Qualified Intermediary Role & Responsibilities Flashcards

What is the primary role of a Qualified Intermediary (QI) in a 1031 exchange?

Answer: To hold exchange proceeds and facilitate the exchange to avoid actual or constructive receipt by the taxpayer

The QI holds the exchange proceeds and acts as the intermediary to ensure the taxpayer does not have actual or constructive receipt of the funds.

Who is expressly disqualified from serving as a QI under Treasury Regulations?

Answer: The taxpayer's attorney who represented them in the last two years

Disqualified persons include the taxpayer's employee, attorney, accountant, investment banker, or real estate agent if they served the taxpayer within the two-year period preceding the exchange.

What document does the QI use to acquire the rights to the relinquished property without taking title?

Answer: An assignment agreement

The QI uses an assignment of the taxpayer's rights under the sale contract to step into the exchange without taking title to the property.

Where must the QI hold 1031 exchange proceeds?

Answer: In a segregated, separate account, trust, or escrow for each exchanger

Best practices and many state regulations require QIs to hold funds in separate, segregated accounts for each exchanger to protect client funds.

What is 'constructive receipt' in the context of a 1031 exchange?

Answer: When the taxpayer has control over or the ability to access the exchange proceeds

Constructive receipt occurs when the taxpayer has the ability to control, pledge, or demand the exchange funds, which would disqualify the exchange.

What must the exchange agreement between the taxpayer and QI restrict to prevent constructive receipt?

Answer: The taxpayer's access to exchange funds except upon completion of the exchange, exchange failure, or expiration of the exchange period

The exchange agreement must limit the taxpayer's access to proceeds to specific triggering events that do not compromise the exchange.