INTRICACIES OF DEALING WITH A QUALIFIED INTERMEDIARY

In an era of increasingly complex real estate transactions one of the most complex, the real estate Exchange, has now become much simpler. Individuals, as well as their tax, legal, and real estate advisors had shied away from the concept of real estate Exchanges largely due to the uncertainty of the law and their unfamiliarity with the needed concepts to perform a proper Exchange. This uneasiness was probably a legacy from the early days of "Starker" (delayed) Exchanges, which were viewed as an aggressive tax concept.

The opportunity for investors to take advantage of the tax deferral remains to be one of the largest motivations to invest in real estate. This tax-deferral allows your tax dollars to remain invested in real estate rather than being paid out as taxes in favor of our government. Funds that otherwise would be dedicated to paying capital gains tax can now be directed via a deferred Exchangetoward the purchase of a replacement property deemed of a like-kind. This allows the taxpayer to control a much larger replacement property with funds that would normally be payable to Uncle Sam in the form of capital gains tax when disposing of business or investment-held property.

Today, there has never been a better time for a properly structured real estate Exchange. Because of the new Treasury Regulations, published in the "Federal Register", May 1, 1991 the real estate industry is experiencing a boom in the Exchangeof business and investment-held property. These regulations have been called the most favorable Reg's to the real estate investor in years and the last legitimate tax shelter available to the real estate investor.

Under the new regulations, what were called delayed ex- changes are now referred to as "deferred Exchanges". The IRS, has been very accommodating in providing a reasonable structure to follow when structuring deferred Exchanges, but has served notice on the tax and real estate community that they will be closely watching the deferred Exchangetransaction and are requiring that the guidelines of the new regulations must be observed in all respects. It is imperative that taxpayers as well as their real estate professional attorney, accountant/cpa and qualified intermediary observe the established guidelines to insure the integrity of their proposed Exchange. With the adoption of the new regulations the element of certainty is finally established to allow the taxpayer and the real estate professional, the flexibility of performing a deferred Exchange.

What Is a Professional Qualified Intermediary

The professional qualified intermediary is in the business of facilitating deferred Exchanges. They protect the integrity of the form of the transaction to ensure tax deferred treatment. They protect the taxpayer's tax treatment by compliance with any or all "safe harbors" which are incorporated and by performing as required in the Exchangeagreement and ensure performance and protect against misappropriation.

Customary Services of a Professional Qualified Intermediary

Professional qualified intermediaries usually seek this type of business and in turn, charge a fee for providing their services. Such customary services should include; an initial consultation with the taxpayer to gather data and determine the objectives of the taxpayer, Exchangetransaction analysis which is the actual structuring process of the Exchange, Exchangeconsultations with the taxpayers real estate agent/broker, attorney, accountant/cpa or any other party to the transaction, any necessary research of the transaction issues, preparing the necessary Exchangedocuments, including the qualified intermediary agreement, Exchangeagreement, escrow agreement, closing instructions, assignments of contract for the relinquished and replacement properties, the administration of the qualified escrow account and the acceptance of the contract rights or title of the relinquished and replacement properties.

A professional qualified intermediary should have special training in negotiation, contract law, taxation, investment analysis, escrow procedures and real estate practice as well as having a proven success record in the field of facilitating real estate Exchanges. The professional qualified intermediary is a valuable resource to the taxpayer, the real estate agent/broker, attorney and accountant/cpa involved in the transaction. A properly trained professional qualified intermediary becomes the quarterback of the transaction and will identify problems before they threaten the Exchange.

The qualified intermediary should be a principal in the transaction and needs to have legal title of both the relinquished and replacement properties conveyed to him/her or have the rights of the contracts assigned to him/her before the closing of the relinquished property. The qualified intermediary needs to be something more than just an escrow agent, which is also needed (qualified escrow) to ensure that the proceeds from disposition are credited to the qualified intermediary and not the taxpayer or an agent of the taxpayer. That means the qualified intermediary cannot be the taxpayer, a member of the taxpayers family, an employee of the taxpayer, an agent of the taxpayer at the time of the Exchangetransaction or any agent of the taxpayer within a twenty-four month period prior to the Exchangetransaction.

If the qualified intermediary were to be one of the above, he or she would be labeled a "disqualified person", and would blow the Exchangetransaction. If a individual calling himself or herself a qualified intermediary is doing nothing more than acting as an escrow agent (qualified escrow), it is very clear that the Exchangetransaction will not qualify as a deferred Exchange.

What to Look for when Selecting a Qualified Intermediary

The most important person involved in structuring real estate Exchanges today, is the professional qualified intermediary. The qualified intermediary should be carefully chosen so that the Exchangecan be defensible. As principal in the Exchangetransaction, the qualified intermediary will be as responsible as the taxpayer for performance of contractual obligations in the relinquished and replacement properties. The professional qualified intermediary should be a corporation instead of an individual primarily because death or incapacity of an individual qualified intermediary would affect a real estate Exchange. Probate, for example, could delay timely closing of the replacement property and blow the Exchangetransaction.

Since the qualified intermediary is the most important part of a real estate Exchange, its important to know who you are dealing with. You should ask questions such as how long has the qualified intermediary been in business, do they provide qualified intermediary services only, on a full-time basis, or are you there guinea pig? Do they have any formal training or a professional designation in real estate exchanging. Today, real estate professionals, attorneys and accountants, seeking to become educated in the exchanging business, can procure a professional designation called the (CEA), Certified ExchangeAdvisor, designation which is offered through the American Institute Of Real Estate Exchangors (716) 655-5810.

It's amazing the number of people who only want to know how much a qualified intermediary charges and picks one who charges the least rather than knowing what services are being provided and whether the intermediary knows what they are doing. You may save a few dollars, but will the IRS, accept that as an excuse if the Exchangeis handled incorrectly? Don't shop just for price. You wouldn't do the same when choosing a doctor or a building contractor, so why should that be any different when choosing someone to handle what might be your largest investment? Your Exchangecan only be done once, make sure its done right the first time.

Real Estate Agents Liability

Real estate agents are liable for whatever they say or do.

Real estate agents are also liable for whatever they do not say or do. An agent is expected to advise his/her clients of the transaction alternatives available including the potential for structuring their transaction as an Exchange. Just about every listing agreement in the United States today states, that the real estate agent who is executing a listing agreement when marketing the property is marketing it for sale, Exchange, rent or lease. But the concept of exchanging versus treating the transaction as a sale just never comes up. The real estate agent should never represent themselves as Exchangeexperts unless they are. It is unfair to the broker for his/her agents to make representations that jeopardize the agent and the brokerage. Nor should the real estate agent advise against a real estate Exchangebecause they are not familiar with the concept or feel that they may jeopardize their transaction somehow by recommending an Exchangeeven without having any expertise in the subject matter. The real estate agent has a certain responsibility to their clients. That responsibility should include that if they don't understand how a real estate Exchangeworks they should recommend to their client to speak with a professional who specializes in the structuring of a real estate Exchanges.

Today, we are finding many lawsuits that are being brought against real estate agents their brokers and even attorneys for misrepresentation of this matter to their clients. A number of these cases have been settled out of court and are taking place nationally. The real estate agent must understand their role in an Exchangetransaction and how they work together with the professional qualified intermediary.

Opportunities for the Real Estate Professional

Exchangebrokerage is not much different than listing and selling your clients' personal residences. The job of the real estate professional is to still satisfy the wants and needs of the client. There are real estate professionals who actively utilize exchanging to motivate investment or business owners to dispose. Exchangeagents find that most clients will dispose their properties if the agent can present a better investment. Exchangeagents can create transactions by producing opportunities for clients to obtain more benefits and, subsequently, generate greater commissions for themselves. The real estate professional must understand their role in the Exchangeprocess meaning exchanging is a tool to be used as part of the present brokerage business that they currently provide. They need to make a good relationship with a professional qualified intermediary that they can work with, allowing the real estate professional to provide their present services as well as the qualified intermediary providing their services in a team effort.

If you are a real estate professional and you are in the business of brokering any type of real estate other than personal-use property, which includes either primary or secondary residences, you have an opportunity to earn two commissions on one transaction. This is possible today, through deferred Exchanges. The real estate agent/broker, who lists the subject property being disposed of, will earn a commission on the sale end even though their client is treating the transaction as an Exchangeand will earn a second commission on the purchase of the replacement property.

The beauty of this concept is that the taxpayer (seller) has to acquire the new replacement property within six months of the closing date ("Exchangeperiod") of their sale. 

Today, earning two commissions on one transaction is one of the smartest ways a real estate agent/broker can use there time and one of the best ways for their clients to accumulate wealth through the use of real estate.

With the guidelines of the new regulations and the use of a properly trained and experienced professional qualified intermediary, the taxpayer can sleep nights when using the ”Best Kept Secret in Real Estate – Real Estate Exchanges”.