Tax-deferred exchanges originated in 1921 as simple two-party barter exchanges. Over the passing decades tax laws changed by requiring exchanges to be multi-party transactions. In 1991, the Internal Revenue Service (“IRS”) formally defined the role of the “Qualified Intermediary.” The Qualified Intermediary is also known as an Accommodator or Facilitator. Investors should seek out a Qualified Intermediary capable of handling the proper execution of necessary documentation as well as informing investors of the various facets of exchanges. ERI consistently excels in providing investors with these critical services.
Today §1031 of the Internal Revenue Code governs exchanges. An exchange typically involves a Qualified Intermediary receiving
the sale proceeds of the property the investor wishes to sell (“relinquished property”). The investor then instructs the Qualified Intermediary to purchase the new property (“replacement property”) and convey title to the replacement property to the investor. Commercial, agricultur- al, industrial, residential or vacant land may all be exchanged. By properly effectuating an exchange, the investor is able to defer the realization of capital gains on the sale of the relinquished property.
This deferral allows funds that would have other- wise gone to pay capital gains tax to be allocated toward a greater investment. An investor is also permitted to defer the 25% tax on the recapture of depreciation taken on an investment property when they elect to effectuate a §1031 exchange.