A qualified intermediary is a third party who coordinates a 1031 exchange, a real estate transaction used in the US to avoid capital gains taxes. The intermediary must not have a prior relationship with the taxpayer, and mistakes can be costly. The term also refers to foreign banks in a special relationship with the IRS.
A qualified broker is a third party who coordinates a 1031 exchange, a type of real estate transaction used in the United States to avoid capital gains taxes on real estate sales. In a 1031 swap, also known as a lookalike swap, a taxpayer sells a property and immediately buys a similar replacement. Qualified intermediaries facilitate these transactions and handle much of the associated paperwork to ensure that the Internal Revenue Service is satisfied with the conduct of the exchange.
To act as a qualified intermediary, a natural or legal person must not have a prior relationship with a taxpayer. Family members cannot offer this service, nor can people such as real estate specialists, lawyers and accountants with whom the taxpayer has worked in the past two years. Qualified intermediaries are generally companies that specialize in real estate transactions, as they have extensive experience with this type of transaction.
During the 1031 exchange, the taxpayer transfers the property being sold to the authorized intermediary. If a property of the same nature is found, the authorized intermediary arranges for the transfer of the property sold to a new buyer and for the transfer of the new property to the taxpayer. The broker may also hold trust funds under the arrangement. Processing the deal through an authorized third party allows the taxpayer to avoid paying capital gains on the property sold.
1031 the exchanges are complex and must be carried out in strict compliance with the law. If mistakes are made during the deal, the taxpayer could end up paying for them and the cost could be high. When selecting a qualified broker it is advisable to use people who are highly recommended and have substantial experience with these types of property exchanges. Professional qualifications such as licenses to practice can be checked against the records of certifying organizations to confirm that the broker is indeed a member in good standing of the organization.
This term is also used to describe foreign banks in a special relationship with the Internal Revenue Service. These banks may accept deposits from American citizens and are required to report on them, as well as withhold withholding tax on interest income. This system is designed to prevent Americans from hiding their taxable income abroad. The functioning of this system underwent an overhaul in the early 2000s in response to scandals with foreign banks failing to perform their duties.
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