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  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Can a Taxpayer Use Exchange Proceeds to Build on Property Owned by a Related Party?

    Utilizing a long term ground lease on real estate owned by a party related to the taxpayer can enable a taxpayer to invest proceeds into making improvements on that property. In a recent blog post we discussed build-to-suit and property improvement exchanges.  As that post made clear, a taxpayer cannot do improvements on property that is already owned by the taxpayer. Another post pertaining to exchange transactions between related parties underscored the admonition against a taxpayer acquiring replacement property from a related party.  Merging these two issues provides an opportunity for us to discuss the potential of a taxpayer using exchange proceeds to improve a property owned by a related party.
    This type of transaction is made possible by introducing a long term lease for the property into the ownership structure of the land.  For 1031 exchange purposes, a long term lease is defined as a lease with 30 years or more to run, including renewal options.  As an example, a ten year ground lease with two ten year options would be a sufficient interest in the land to constitute an ownership of the “leasehold estate” by the lessee which is legally recognizable as a separate and distinct ownership from that of the underlying land itself.  This long term interest is considered like-kind to a direct (“fee”) interest in land.  Consequently if improvements are built upon the land those improvements belong to the ground lessee and conversely, the land owner, the related party, has no ownership rights in those improvements.    
    Looking back to the rules disallowing a taxpayer to build on property it already owns, this issue can be resolved by having an Exchange Accommodation Titleholder (“EAT”) become the ground lessee and for the EAT to build the improvements per the plans and specifications required by the taxpayer (This was the gist of the first blog referenced above).  Further, if the interest in a long term ground lease, including improvements upon the property, is recognized as a separate and distinct real property interest, then the taxpayer’s receipt of these leasehold improvements should not be deemed to be received from the underlying related party land owner.
    This structure was the subject of a 2002 Private Letter Ruling. In that fact pattern the related party was not the land owner but rather a lessee itself of the property under a long term lease.  As stated above, a long term lease interest for 1031 exchange purposes is the same as a fee interest and, as such, the ground lease was subleased to an EAT for purposes of constructing upon the property.  This structure was approved.
    A short time later PLR 200329021 was issued.  In this case too, the related party had a lease in excess of thirty years.  The leasehold interest was assigned to an EAT for purposes of constructing taxpayer desired improvements.  This structure got a favorable ruling from the IRS.
    The most recent ruling on this structure was PLR 201408019. In this case a part of the property leased to the related party was subleased to an EAT with a lease term in excess of thirty years.  Similar to the findings in the prior Private Letter Rulings, the IRS ruled that the sublease and the improvements were like kind to the taxpayer’s fee interest in the relinquished property.
    There were a couple of common threads to these rulings which someone structuring such a transaction should keep in mind. 

    First, a fair market rental payment was paid by the EAT to the lessor/sublessor. Sometimes in practice the start of those payments is deferred for the first 180 days of the sublease in order to avoid having the EAT getting involved with the rent payment. 
    Second, the lease/sublease should have 30 or more years to run as of the time the EAT leases the property. 
    Lastly, the rulings all had language suggesting that neither the related party nor the taxpayer should dispose of its interest for at least two years, which is a requirement of one of the exceptions to the related party rules. 

    Regarding this last item, one could argue that had the related party been the land owner, the two year holding requirement would not be needed since the taxpayer would receive nothing from the related party throughout the transaction.  The fact that the EAT is leasing the property from the related party should not be relevant. The situation in the Private Letter Rulings involved the EAT taking an assignment of the ground lease from the related party and the ground lease was ultimately transferred to the taxpayer. Nevertheless, it is not usually necessary in these transactions for a party to dispose of either property within two years, so it is not a burdensome requirement in any event. Also, most advisors agree that the lease relationship can be terminated after a time in excess of two years when the exchange transaction is considered “old and cold.”
    So, quite often a taxpayer – whether an individual, partnership or limited liability company – has the desire to use exchange proceeds towards building upon land owned by a related person or entity.  The taxpayer can take advantage of the legal fiction that improvements to property under a long term ground lease do not constitute building upon the underlying land owned by a related party and therefore they can use exchange proceeds to fund the improvements. They are acquiring the improvements from the EAT and not the related party.
    Documents for a build-to-suit under a ground lease on property owned by a related party include:

    Qualified Exchange Accommodation Agreement
    Ground Lease
    Build-to-Suit Agreement between Taxpayer and EAT
    Agreement between Contractor and Owner
    Evidence of Liability Insurance, including Builder’s Risk coverage
    Environmental Indemnity

  • Accruit COO Finalist for Outstanding Women in Business Award

    Accruit’s Chief Operating Officer, Denver Business Journal recognizes Denver’s most influential women with awards in the categories of Architecture, Engineering and Construction; Banking, Finance and Accounting; Communications, Media and Public Relations; Education, Government and Nonprofits; Health Care; Large Business Owner; Law; Mile High Leaders; Real Estate; Small Business Owner; Technology and Telecommunications; Lifetime Achievement and the newly added Energy Industry.
    The other finalists in the Banking, Finance and Accounting category are Kathryn Albright of U.S. Bank and Barbara Brohl of the Colorado Department of Revenue. View a Outstanding Women in Business Awards Luncheon on Thursday, August 20, 2015.

  • Accruit COO Finalist for Outstanding Women in Business Award

    Accruit’s Chief Operating Officer, Denver Business Journal recognizes Denver’s most influential women with awards in the categories of Architecture, Engineering and Construction; Banking, Finance and Accounting; Communications, Media and Public Relations; Education, Government and Nonprofits; Health Care; Large Business Owner; Law; Mile High Leaders; Real Estate; Small Business Owner; Technology and Telecommunications; Lifetime Achievement and the newly added Energy Industry.
    The other finalists in the Banking, Finance and Accounting category are Kathryn Albright of U.S. Bank and Barbara Brohl of the Colorado Department of Revenue. View a Outstanding Women in Business Awards Luncheon on Thursday, August 20, 2015.

  • Accruit COO Finalist for Outstanding Women in Business Award

    Accruit’s Chief Operating Officer, Denver Business Journal recognizes Denver’s most influential women with awards in the categories of Architecture, Engineering and Construction; Banking, Finance and Accounting; Communications, Media and Public Relations; Education, Government and Nonprofits; Health Care; Large Business Owner; Law; Mile High Leaders; Real Estate; Small Business Owner; Technology and Telecommunications; Lifetime Achievement and the newly added Energy Industry.
    The other finalists in the Banking, Finance and Accounting category are Kathryn Albright of U.S. Bank and Barbara Brohl of the Colorado Department of Revenue. View a Outstanding Women in Business Awards Luncheon on Thursday, August 20, 2015.

  • How to Choose a Qualified Intermediary for your 1031 Exchange

    There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.
    To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:

    Related Parties – Including certain family members and business entities with shared/common ownership.
    Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.

    Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.
    I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.
    While it’s true that any third party can legally provide the service outlined above, they’ll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service’s safe harbor guidelines. I inquired further:

    Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.
    Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?
    Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?
    Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?
    Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?
    Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?
    Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?

    When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.  “All we did was hold the money and then forward it to the seller when it came time to buy.”
    Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.
    https://info.accruit.com/start-an-exchange”>

     
     
     

  • How to Choose a Qualified Intermediary for your 1031 Exchange

    There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.
    To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:

    Related Parties – Including certain family members and business entities with shared/common ownership.
    Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.

    Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.
    I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.
    While it’s true that any third party can legally provide the service outlined above, they’ll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service’s safe harbor guidelines. I inquired further:

    Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.
    Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?
    Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?
    Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?
    Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?
    Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?
    Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?

    When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.  “All we did was hold the money and then forward it to the seller when it came time to buy.”
    Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.
    https://info.accruit.com/start-an-exchange”>

     
     
     

  • How to Choose a Qualified Intermediary for your 1031 Exchange

    There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.
    To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:

    Related Parties – Including certain family members and business entities with shared/common ownership.
    Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.

    Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.
    I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.
    While it’s true that any third party can legally provide the service outlined above, they’ll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service’s safe harbor guidelines. I inquired further:

    Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.
    Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?
    Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?
    Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?
    Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?
    Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?
    Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?

    When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.  “All we did was hold the money and then forward it to the seller when it came time to buy.”
    Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.
    https://info.accruit.com/start-an-exchange”>

     
     
     

  • How to Choose a Qualified Intermediary for your 1031 Exchange

    There is an old adage that states “Just because you can do something-doesn’t mean you should.” This sage advice certainly applies to choosing a qualified intermediary to facilitate a 1031 like-kind exchange. The use of a qualified intermediary is essential to completing a successful 1031 exchange because, while the process of completing an exchange is straightforward, the rules are complicated and loaded with potential pitfalls for the exchanger if the exchange is not properly prepared.
    To simplify the discussion and underscore the potential challenges of selecting a qualified intermediary, let’s identify parties who cannot act as a qualified intermediary. This list is relatively short and essentially disqualifies those who have acted in some advisory capacity for your company during the two years prior to a potential exchange:

    Related Parties – Including certain family members and business entities with shared/common ownership.
    Agents – Including individuals that have provided services to the exchanging taxpayer as an employee, attorney, accountant, investment banker or broker within the two year period ending on the date of the transfer of the first of the relinquished properties.

    Aside from the above, virtually anyone can legally act in the capacity of a qualified intermediary, and therein lies the potential for disaster.
    I spoke about 1031 exchanges recently at a conference where one of the attendees, an equipment dealer who had advised a customer on their like-kind exchange, stated his belief that the only requirement for a qualified intermediary was that they be a third party who could hold the money from the sale of the relinquished equipment until the seller requires the money for the purchase of replacement property.
    While it’s true that any third party can legally provide the service outlined above, they’ll likely fall short of providing a properly-structured 1031 exchange that satisfies the Internal Revenue Service’s safe harbor guidelines. I inquired further:

    Did the selling party execute an Exchange Agreement outlining the safe harbor compliance rules? Without specific restrictions on the sales proceeds contained in this agreement, the exchanger still has constructive receipt of funds from the sale.
    Did the third party create a separate bank account for the specific benefit of the seller/exchanger during the exchange period?
    Did the seller notify the buyer that they had assigned their interests and rights in the sold equipment to the qualified intermediary?
    Did your customer notify the seller that he had assigned his interests and rights in the new equipment to the qualified intermediary?
    Did your customer send a Replacement Property Identification Notice to the qualified intermediary before the expiration of the identification period, identifying the equipment the buyer planned on purchasing by one of the two approved methods?
    Did you (the equipment store) notify the customer that he had 45 days to identify potential replacement equipment and up to 180 days from the sale of the used equipment to purchase the new replacement equipment?
    Did you provide all of the documentation and signatures required by the Treasury to ensure that the seller indeed satisfied the IRC safe harbor compliance rules and regulations?

    When the color returned to his face and the nausea had passed, the equipment dealer uttered the far too common response of someone who had purported to serve as a qualified intermediary but was not one.  “All we did was hold the money and then forward it to the seller when it came time to buy.”
    Like-kind exchanges offer sellers of used equipment a tremendous opportunity to reinvest in funds that would otherwise be lost to taxes, but in order to enjoy this benefit exchangers must follow a document and deadline driven process. When engaging a qualified intermediary, be certain that they understand the necessary documents, steps, and safe harbors that are inherent in Section 1031. Doing so will result in a properly-structured and secure exchange.
    https://info.accruit.com/start-an-exchange”>