Category: 1031 Exchange General

In 2007, Michael Bay directed the film Transformers, which some might argue was his greatest film to-date. Transformers follows a young man who gets tossed into an alien war between the Autobots and the Decepticons, both of whom are on Earth disguised as different motor vehicles but can transform into huge warring robots in a moment. It was way back in 1984 when Hasbro launched the Transformer line of toys that inspired the recent films. Toys that had kids around the world singing the refrain, Transformers! More than meets the eye!
Qualified intermediaries (QIs) are more than meets the eye as well. No, they don’t transform into vehicles or robots, but they are often seen in a limited light. You’re likely aware of the QI’s primary duties in a 1031 exchange:

Structuring the 1031 exchange
Preparing the related documentation
Safeguarding proceeds from the sale of the relinquished property(ies)
Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

While these are important responsibilities, a QI can add value in the following areas, as well:

Exchange related information and expertise
Speaking commitments
Co-sponsoring events
Continuing education courses
Participating in client-facing meetings

Qualified intermediaries provide 1031 exchange-related information and expertise.
A common phrase heard among QIs is they do not provide tax advice. However, what they can provide is detailed exchange information. How many times does a like-kind exchange (LKE) fail to get off the ground because the exchanger does not have the right information and decides to back out of the LKE? If a person or company has the chance to save 30-40% by conducting an exchange, having a free conversation with a 1031 exchange expert on potential options makes a lot of sense. Paying taxes is never pleasant, but paying unnecessary taxes is ill-advised.
Qualified intermediaries are available as speakers.
Throughout the year brokers, bankers, CPAs, and other industry groups organize speaking engagements at conferences and company parties, in front of clients and prospects. QIs, as speakers, are often available to present at such occasions, providing educational value free of charge.
Qualified intermediaries will often co-sponsor events.
Similarly, QIs can also help by co-sponsoring events. The real estate industry puts on many events that draw a variety of professionals (title closers, escrow agents, and realtors). QIs are in a position to benefit from shared relationships or contact with new groups of professionals and therefore are often interested in co-sponsoring such events.
Qualified intermediaries are great sources of continuing education.
The opportunity to provide training to individuals in need of credit hours remains an effective use of the qualified intermediary’s expertise and time.  Realtors, brokers, accountants, and lawyers are among the professionals who require continuing education hours on an annual basis, and many QIs can provide webinar or in-person training to meet those needs. QIs enjoy this opportunity because it allows the QI to introduce themselves and their companies to a new and focused group.
Qualified intermediaries are available for client-facing meetings.
Tax topics can make anyone cringe, so it is no wonder that realtors, brokers, and other advisors do not enjoy diving into the details when faced with a client interested in a 1031 exchange. Frequently, a QI is brought in to speak directly with the client, explain the process, and answer their questions.
Summary
Your qualified intermediary will structure the 1031 exchange, prepare the related documentation, and safeguard the proceeds from the sale of the relinquished property. The QI will also monitor and advise throughout the exchange to ensure compliance. But there is much more a QI can do to advise, educate, and partner with those interested in learning more about the 1031 exchange process.
In today’s economy any proper advantage should be pursued, whether that is a marketing strategy, discounted pricing, or a tax benefit like a 1031 exchange. When working with a QI, remember to take advantage of their expertise. Qualified intermediaries may have yet to master the art of transforming into robots or vehicles, but they are indeed more than meets the eye.
Photo:

In 2007, Michael Bay directed the film Transformers, which some might argue was his greatest film to-date. Transformers follows a young man who gets tossed into an alien war between the Autobots and the Decepticons, both of whom are on Earth disguised as different motor vehicles but can transform into huge warring robots in a moment. It was way back in 1984 when Hasbro launched the Transformer line of toys that inspired the recent films. Toys that had kids around the world singing the refrain, Transformers! More than meets the eye!
Qualified intermediaries (QIs) are more than meets the eye as well. No, they don’t transform into vehicles or robots, but they are often seen in a limited light. You’re likely aware of the QI’s primary duties in a 1031 exchange:

Structuring the 1031 exchange
Preparing the related documentation
Safeguarding proceeds from the sale of the relinquished property(ies)
Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

While these are important responsibilities, a QI can add value in the following areas, as well:

Exchange related information and expertise
Speaking commitments
Co-sponsoring events
Continuing education courses
Participating in client-facing meetings

Qualified intermediaries provide 1031 exchange-related information and expertise.
A common phrase heard among QIs is they do not provide tax advice. However, what they can provide is detailed exchange information. How many times does a like-kind exchange (LKE) fail to get off the ground because the exchanger does not have the right information and decides to back out of the LKE? If a person or company has the chance to save 30-40% by conducting an exchange, having a free conversation with a 1031 exchange expert on potential options makes a lot of sense. Paying taxes is never pleasant, but paying unnecessary taxes is ill-advised.
Qualified intermediaries are available as speakers.
Throughout the year brokers, bankers, CPAs, and other industry groups organize speaking engagements at conferences and company parties, in front of clients and prospects. QIs, as speakers, are often available to present at such occasions, providing educational value free of charge.
Qualified intermediaries will often co-sponsor events.
Similarly, QIs can also help by co-sponsoring events. The real estate industry puts on many events that draw a variety of professionals (title closers, escrow agents, and realtors). QIs are in a position to benefit from shared relationships or contact with new groups of professionals and therefore are often interested in co-sponsoring such events.
Qualified intermediaries are great sources of continuing education.
The opportunity to provide training to individuals in need of credit hours remains an effective use of the qualified intermediary’s expertise and time.  Realtors, brokers, accountants, and lawyers are among the professionals who require continuing education hours on an annual basis, and many QIs can provide webinar or in-person training to meet those needs. QIs enjoy this opportunity because it allows the QI to introduce themselves and their companies to a new and focused group.
Qualified intermediaries are available for client-facing meetings.
Tax topics can make anyone cringe, so it is no wonder that realtors, brokers, and other advisors do not enjoy diving into the details when faced with a client interested in a 1031 exchange. Frequently, a QI is brought in to speak directly with the client, explain the process, and answer their questions.
Summary
Your qualified intermediary will structure the 1031 exchange, prepare the related documentation, and safeguard the proceeds from the sale of the relinquished property. The QI will also monitor and advise throughout the exchange to ensure compliance. But there is much more a QI can do to advise, educate, and partner with those interested in learning more about the 1031 exchange process.
In today’s economy any proper advantage should be pursued, whether that is a marketing strategy, discounted pricing, or a tax benefit like a 1031 exchange. When working with a QI, remember to take advantage of their expertise. Qualified intermediaries may have yet to master the art of transforming into robots or vehicles, but they are indeed more than meets the eye.
Photo:

In 2007, Michael Bay directed the film Transformers, which some might argue was his greatest film to-date. Transformers follows a young man who gets tossed into an alien war between the Autobots and the Decepticons, both of whom are on Earth disguised as different motor vehicles but can transform into huge warring robots in a moment. It was way back in 1984 when Hasbro launched the Transformer line of toys that inspired the recent films. Toys that had kids around the world singing the refrain, Transformers! More than meets the eye!
Qualified intermediaries (QIs) are more than meets the eye as well. No, they don’t transform into vehicles or robots, but they are often seen in a limited light. You’re likely aware of the QI’s primary duties in a 1031 exchange:

Structuring the 1031 exchange
Preparing the related documentation
Safeguarding proceeds from the sale of the relinquished property(ies)
Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

While these are important responsibilities, a QI can add value in the following areas, as well:

Exchange related information and expertise
Speaking commitments
Co-sponsoring events
Continuing education courses
Participating in client-facing meetings

Qualified intermediaries provide 1031 exchange-related information and expertise.
A common phrase heard among QIs is they do not provide tax advice. However, what they can provide is detailed exchange information. How many times does a like-kind exchange (LKE) fail to get off the ground because the exchanger does not have the right information and decides to back out of the LKE? If a person or company has the chance to save 30-40% by conducting an exchange, having a free conversation with a 1031 exchange expert on potential options makes a lot of sense. Paying taxes is never pleasant, but paying unnecessary taxes is ill-advised.
Qualified intermediaries are available as speakers.
Throughout the year brokers, bankers, CPAs, and other industry groups organize speaking engagements at conferences and company parties, in front of clients and prospects. QIs, as speakers, are often available to present at such occasions, providing educational value free of charge.
Qualified intermediaries will often co-sponsor events.
Similarly, QIs can also help by co-sponsoring events. The real estate industry puts on many events that draw a variety of professionals (title closers, escrow agents, and realtors). QIs are in a position to benefit from shared relationships or contact with new groups of professionals and therefore are often interested in co-sponsoring such events.
Qualified intermediaries are great sources of continuing education.
The opportunity to provide training to individuals in need of credit hours remains an effective use of the qualified intermediary’s expertise and time.  Realtors, brokers, accountants, and lawyers are among the professionals who require continuing education hours on an annual basis, and many QIs can provide webinar or in-person training to meet those needs. QIs enjoy this opportunity because it allows the QI to introduce themselves and their companies to a new and focused group.
Qualified intermediaries are available for client-facing meetings.
Tax topics can make anyone cringe, so it is no wonder that realtors, brokers, and other advisors do not enjoy diving into the details when faced with a client interested in a 1031 exchange. Frequently, a QI is brought in to speak directly with the client, explain the process, and answer their questions.
Summary
Your qualified intermediary will structure the 1031 exchange, prepare the related documentation, and safeguard the proceeds from the sale of the relinquished property. The QI will also monitor and advise throughout the exchange to ensure compliance. But there is much more a QI can do to advise, educate, and partner with those interested in learning more about the 1031 exchange process.
In today’s economy any proper advantage should be pursued, whether that is a marketing strategy, discounted pricing, or a tax benefit like a 1031 exchange. When working with a QI, remember to take advantage of their expertise. Qualified intermediaries may have yet to master the art of transforming into robots or vehicles, but they are indeed more than meets the eye.
Photo:

The reinvestment goal of any 1031 tax deferred exchange should be to buy replacement property of equal or greater value and to use up all the exchange proceeds in the closing of the replacement property without getting any cash back.  Receiving cash, sometimes called boot, won’t generally terminate the like-kind exchange, however, it will likely trigger a taxable event for the taxpayer, and should be avoided.
Sometimes, the taxpayer receives their replacement property settlement statement, and it shows that they are getting cash back.  What possibly could have caused this?  Below are a few examples of what may have caused the cash back scenario and what can be done to fix the settlement statement prior to the closing in order to avoid the cash boot:

Other credits may appear on the settlement statement
Taxpayer loan terms may need to be adjusted
Taxpayer may be purchasing other properties

Credits on the Settlement Statement Contributing to Cash Boot
If the settlement statement has a credit for earnest money that the taxpayer paid out of pocket, the settlement agent can show an offsetting debit line item and title it “Reimbursement of prepaid earnest money to the buyer.” However, if the qualified intermediary was instructed to pay the earnest money out of the exchange proceeds prior to closing, this offsetting debit is not an option because the taxpayer can’t be reimbursed for an item that they did not prepay out of their pocket.
If the other credits include a credit for property taxes, rent, or security deposit prorations, the taxpayer should consider asking the seller to pay these items to the taxpayer outside of closing or to ask the closer to show these items as paid outside of closing and not as a credit line item.  Even though these non-exchange items are customarily shown as a credit, it is best if they are handled outside of the closing. 
Adjusting Loan Terms to Avoid Cash Boot
If a taxpayer is buying replacement property and is obtaining a loan as a part of the purchase, care must be taken to ensure that all of the exchange proceeds are reinvested into its acquisition.  There have been lenders who have advised clients to combine exchange proceeds with a high balance loan, allowing the taxpayers to receive excess cash back in the closing process.  In their opinion, the cash back is related to the loan proceeds rather than the exchange proceeds.  Unfortunately, the Internal Revenue Service (IRS) does not interpret cash back through the closing that way.  From the IRS’s perspective, the taxpayer is tapping equity through the exchange, and the equity (cash) received will be considered taxable boot if it is done through the closing.  A better route would be to:

Lower the loan amount or
Consider a principle reduction on the settlement statement for the amount of the excess cash back

If the goal is to get some cash back without triggering taxation, one can refinance the relinquished property prior to starting an exchange or refinance the replacement property after the exchange is complete.  Refinancing the relinquished property prior to selling is generally discouraged unless you can argue that the refinance was not in anticipation of the upcoming exchange or it was for independent business reasons.  The preferred method is to refinance the replacement property after the exchange is complete.
Purchasing Additional Properties to Avoid Cash Boot
If cash remains after the measures above are taken, there is a chance the taxpayer has the intent to purchase more than one replacement property.  If that is the case, the closer should only credit the buyer for proceeds needed to purchase the property, without sending cash back to the buyer.  The remaining proceeds will be held by the qualified intermediary pending further purchase transactions.
If the taxpayer is struggling to find properties to consume their remaining exchange proceeds and still within the 45-day identification period, they should call their qualified intermediary or counsel to discuss alternative forms of investment.  Many taxpayers do not realize that investing in certain energy royalty interests, water rights, or passive fractional interests (Delaware Statutory Trusts) may qualify as like-kind under the 1031 rules and allow them to further their tax deferred reinvestment goals.
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