In an effort to assist clients in “like kind exchanges” under the IRS code, Mr. Smith formed Intermediary Services LLC to act as a qualified intermediary pursuant to §1031 of the Internal Revenue Code.
Under Internal Revenue Code § 1031, real property may be sold without incurring a taxable gain under certain conditions. The spirit of the code provision is not to tax the sale of property if such sale is intended to acquire similar property. For example, if an entity (individual or business) holds investment property, this property may be sold without incurring a taxable gain if within the time allowed by the IRS if it is replaced with similar property. Thus, the phrase “like kind exchange” was created.
When selling property, the sales proceeds must be sent to a qualified intermediary to hold until the purchase of similar property. Within 45 days of the closing of the sale of the first property, the seller must notify the qualified intermediary of at least three properties the seller is considering purchasing. Within 180 days of the first closing, the seller must close on the purchase of the similar property. During this time, the qualified intermediary holds the monies from the sale and delivers them to the closing agent for the purchase.
Interestingly, the IRS has ruled that an attorney’s trust account does not suffice to be a qualified intermediary. Typically, a qualified intermediary will deposit the sale proceeds into FDIC insured bank accounts. These accounts are titled to show that they have been established by the intermediary on behalf of the seller. Depending on interest rates and bank fees, the intermediary chooses the best option for the seller, be it certificates of deposit, money markets or simple savings.
No. Although the above scenario is the typical like kind exchange, there
is also a means termed a reverse exchange which includes, among other things,
deeding property to the intermediary until such time as new property is identified
and purchased. The 45 day and 180 day time tables explained above apply here
as well.
Fees for this type of exchange vary and are more expensive than direct exchange
due in part to the nature of the property involved, title considerations
surrounding the property and potential exposure to liability to the intermediary
while it holds title pending the closing of the second transaction.
Some qualified intermediaries charge a percentage of the total transactions which can result in an expensive exchange. For a typical direct exchange as described above Intermediary Services, LLC charges a flat fee of $500.00. This fee does not include any fees which may be charged by the financial institution in which sales proceeds are deposited.
Due to the complexities of a reverse exchange, the fees for these services are quoted on case by case basis.
These fees do not include any additional attorney’s fees which may be incurred for additional services (document preparation, e.g.).