Question 1

What role does a QI play in a 1031 exchange?

Accepted Answer

The QI’s role: enters into an exchange agreement with the taxpayer before the sale, acquires the relinquished property from the taxpayer and transfers it to the buyer (through an assignment of the purchase contract), holds the proceeds in a qualified escrow or trust account, identifies replacement properties (the taxpayer provides the list; the QI documents the identification), acquires the replacement property and transfers it to the taxpayer. The QI’s involvement ensures: the taxpayer never has constructive receipt of the funds, and the exchange complies with IRS regulations (Treasury Regulation 1.1031(k)-1).

Question 2

What are the IRS timeline requirements for a 1031 exchange?

Accepted Answer

Timelines: 45-day identification period (the taxpayer must identify potential replacement properties within 45 days of selling the relinquished property), 180-day exchange period (the taxpayer must close on the replacement property within 180 days of the sale or the due date of the taxpayer’s tax return, whichever is earlier), and these deadlines are strict (no extensions, even for weekends or holidays). Identification rules: the taxpayer can identify up to 3 properties (regardless of value), or any number of properties whose total value does not exceed 200% of the relinquished property’s value.

Question 3

What happens if a 1031 exchange fails?

Accepted Answer

Failure: if the exchange fails (the taxpayer does not identify or close on a replacement property within the deadlines): the QI returns the exchange funds to the taxpayer, the taxpayer recognizes the gain on the sale of the relinquished property (capital gains tax is owed), and the taxpayer may owe state taxes (Florida does not have a state income tax, but other states may). Common causes of failure: inability to find suitable replacement property, financing issues with the replacement property, title or inspection problems, and market conditions.

Qualified Intermediary: in 1031 Exchanges

Qualified Intermediary for 1031 Exchanges

QI Role

Timelines

If Exchange Fails

Related Terms

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