The Role of the Intermediary
(Evergreen Tax Exchange Inc.)The regulations of Section 1031 require the use
of a qualified intermediary to act as a middleman for the Exchanger. The intermediary is
an independent fourth party which acquires and conveys both properties and receives,
holds, and controls the sale proceeds. The use of a qualified intermediary provides many
advantages such as the right to direct deed, protection against imputation of agency, and
the safe harbor regulations relating to the security of Exchanger's escrow funds.
WHAT IS A 1031 EXCHANGE?
Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the
exchange of any type of business use or investment property for any other business use or
investment property. 1031 Exchanges are not really exchanges in the context of two-party
barter. Instead, they are typical sales and purchases that involve the same exact
ingredients as any other sale or purchase, with capital gains being deferred until the
replacement property is transferred in a later taxable transaction. The only real
difference is the investor is increasing his selling and buying power by electing to defer
taxes under Section 1031 regulations. No other aspects of the transaction are affected.
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WHO SHOULD CONSIDER A 1031 EXCHANGE?
Anyone who is thinking about selling a business use or investment property should consider
effecting a 1031 Exchange. An Exchange offers the astute investor an opportunity to
reinvest the federal capital gains that would normally be handed over to the IRS and put
that money to work for himself. You work too hard to simply pay the tax without carefully
considering this reinvestment option. A few advantages of 1031 Exchanges are:
- Consolidation or diversification of investment
- Appreciation and leverage
- Greater cash flow
- Reallocation of investment
- Exchange out of low-basis property into high-basis property
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