Disqualified Person In A 1031 Exchange
Posted by Andy Gustafson on Thu, May 06, 2010
There are many rules associated with a 1031 exchange and one of those is Regulation 1.1031(k)-1(g)(3), (4) defining "disqualified person." A disqualified person cannot act as the qualified intermediary, if considered the agent of the taxpayer at the time of the exchange. A person who has acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two-year period ending on the date of the transaction is treated as an agent. There are exceptions to the rule such as if the person has provided routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, or title/escrow company.
Attorney or CPA Disqualified?
An attorney or CPA may not act as the taxpayer's qualified intermediary if the attorney or CPA has performed legal or financial services respectively, for the taxpayer within the two year period of the transaction unless such services were with respect to exchanges of property intended to qualify for a 1031 tax deferral. Granted there are attorneys and CPAs who have accommodated exchanges despite having provided nonexchange related services to the taxpayer within the two year period. Doing so deprives their clients of the safe harbor provisions of the exchange regulations and could be considered an ethical violation or malpractice if challenged on that basis.
Conclusion
It is always suggested to seek the counsel of your lawyer and CPA prior to initiating a 1031 exchange. They can determine the taxable gain to be deferred.