1031 exchange fees represent payment to a Qualified Intermediary (QI) to accommodate a 1031 tax deferred exchange. A 1031 exchange is a tax deferral strategy federal and state taxpayers utilize to postpone the payment of capital gains and recaptured depreciation taxes when selling and replacing real and personal property held in a trade, business or for investment. Both foreign and resident individuals, trusts, partnerships and corporations use this section of the Internal Revenue Code (IRC) to defer gain on farms, timberland, apartments, shopping centers, single family rentals, aircraft, artwork, vintage cars and equipment. In 2012, the Joint Committee on Taxation estimates that $3.2 billion in taxes were deferred with $1.2 billion to be initiated by individuals.
1031 exchange fees, for many first time exchangors, represent their most important take-away when interviewing prospective Qualified Intermediaries (QIs). In this day of instant information, QI services though specialized, are commoditized by the consumer. This article is about insight from a QI’s perspective of the exchangor’s mindset after realizing they need to find an accommodator or facilitator of 1031 tax deferred exchanges.
The successful implementation of a 1031 tax deferred exchange requires the involvement of a 1031 intermediary. The role of the intermediary is to prepare legal documents in accordance with the 1031 code and to hold the exchange proceeds in a manner that limits the taxpayer’s rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary. The Internal Revenue Code (IRC) Section 1031 Regulation states that a qualified intermediary is not the taxpayer or a person considered an agent of the taxpayer.