§1031 Exchange Intermediary

In the summer of 2008, I was honored to be asked to author an article for The Auctioneer, the official publication of the National Auctioneers Association, on the subject of Section 1031 exchanges and their application within the auction industry. The article was published in the September 2008 issue. If you would like to access the article online, it can be found on pages 62-64 of this link: The Auctioneer. The article is reprinted in three blog entries; this is the third of the three. (Part 1 can be found here; Part 2 here.)

What is the difference between the exchange agent and the closing company? Can they be the same company or must they be different? The exchange company oversees the closing to ensure that it complies with the requirements of Section 1031. The closing company actually conducts the closing and cooperates with the exchange company to meet those requirements. Restrictions within Section 1031 prevent certain parties who are agents of the taxpayer from functioning as their Qualified Intermediary. This includes relatives, the exchanger’s attorney, accountant, employee, investment banker or real estate broker or agent. The code specifically excludes a title company from the list of disqualified parties. Often, title companies that also function as Qualified Intermediaries operate their exchange business under a different name. If you consider having your clients use a closing company as an intermediary, before you refer business to them you should be satisfied that they are knowledgeable about the intricacies of Section 1031 requirements. Working with a full-time exchange specialist generally is a safer course than employing a closing company that tries to accommodate exchanges on a part-time basis.

Why do I care which exchange agent my client uses? If all exchange companies were the same, it would not matter which one your client used. If you deal with more than one exchange company, you will find over time that one is easier to deal with than the others. One will have more knowledge about exchanges. The people at one company will go out of their way to assist you and your auction client. In addition to knowledge and service, you and your client also need to consider the security of your client’s funds. Some QIs promote a bond that they have purchased. Others believe that a dual-signature account requiring the exchanger’s approval plus the directions of the QI to move money is a safer solution. Discuss security of funds with your QI so that you know what actions are being taken to protect your client’s money.

Is there a way an exchange can assist prospective buyers? If you often work with prospective buyers prior to a sale, you should familiarize yourself with reverse exchanges. If you hear a prospect say something like, “I wish I could bid on that piece of ground, but I’d need to sell this piece to buy it,” you should think of a reverse exchange. The term “reverse exchange” is a misnomer, because technically nothing is done in reverse order. In a reverse exchange, the exchanger directs a new entity, such as a single-purpose LLC, (typically formed by the QI) to purchase a property and hold title to it while the exchanger sells one or more properties as the first leg of the exchange. Once those properties sell, the QI arranges a standard exchange between the new entity and the exchanger. The advantage to you in an auction setting is that a reverse exchange can allow you to accept a winning bid from someone who needs to sell another property to buy the one you are auctioning. In conclusion, Section 1031 exchanges can be a boost to your auction business and a service to your clients. The basic structure and rules are straightforward and easy to understand. Idiosyncrasies within nearly every exchange make the involvement of a knowledgeable exchange expert imperative. Awareness of the basics by the auctioneer and the assistance of a respected exchange professional can help set your business apart from the crowd.

The foregoing information is a basic overview of Section 1031 tax-deferred exchanges. In no way does it substitute for tax or legal advice in a particular situation. Please consult your tax and legal advisors before beginning an exchange. Ken Tharp is the owner of Iowa Equity Exchange, a Qualified Intermediary service located in West Des Moines, Iowa. He has been a real estate investor in central Iowa for thirty years. His background includes construction, property management, sales, property rehabilitation and development. Iowa Equity Exchange handles all types of exchanges: delayed, improvement, construction, and reverse structures. For more information about exchanges, go to www.iowaequityexchange.com or contact Ken by phone (515-224-5259 office) or by email at ktharp@iowaequityexchange.com.

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange

Ken Tharp

800-805-1031 toll free

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

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Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 3) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.