Accommodating Party

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Accommodating Party
Section 1031 of the Internal Revenue Code is a great tool for “building your estate with pre-tax dollars.”
A person or entity who agrees to take title to a property in connection with a Section 1031 tax deferred exchange is referred to as the accommodating party. Also called the intermediary or Qualified Intermediary (QI) or Exchange Accommodator. (See delayed exchange.)
The use of a Qualified Intermediary is a crucial aspect of a 1031 exchange, as it helps facilitate the exchange and ensures compliance with IRS regulations.
Here’s how it typically works:
Initiating the Exchange:
The property owner (referred to as the Exchanger) decides to sell their property and defer capital gains taxes by reinvesting the proceeds in a like-kind property.
The Exchanger engages the services of a Qualified Intermediary before closing on the sale of the relinquished property.
Sale of Relinquished Property:
The Exchanger sells their relinquished property, and the sale proceeds are transferred to the Qualified Intermediary rather than directly to the Exchanger. This is a critical step to maintain the tax-deferred status.
Identification and Purchase of Replacement Property:
The Exchanger has a limited period (45 days) to identify potential replacement properties.
Within 180 days of the sale of the relinquished property, the Exchanger must acquire one or more replacement properties using the funds held by the Qualified Intermediary.
Role of Qualified Intermediary:
The Qualified Intermediary holds the sale proceeds during the exchange process.
The QI assists in preparing the necessary documentation and ensures that the exchange meets IRS regulations.
The Qualified Intermediary facilitates the direct transfer of funds from the sale of the relinquished property to the purchase of the replacement property.
Avoiding Constructive Receipt:
The use of a Qualified Intermediary is crucial to avoid “constructive receipt” of the sale proceeds by the Exchanger. If the Exchanger has access to the funds, even briefly, the IRS may consider the exchange invalid, and capital gains taxes may be triggered.
By using a Qualified Intermediary, the Exchanger can take advantage of the 1031 exchange to defer capital gains taxes and invest in a like-kind property.
It’s essential to work with experienced professionals, including a Qualified Intermediary and potentially legal or tax advisors, to ensure compliance with IRS rules and regulations throughout the exchange process.

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