A qualified intermediary is a third party who coordinates a 1031 exchange, a type of real estate transaction used in the United States to avoid capital gains taxes on real estate sales. In a 1031 exchange, also known as a like kind exchange, a taxpayer sells a property and immediately buys a comparable replacement. Qualified intermediaries facilitate these transactions and handle much of the associated paperwork to ensure that the Internal Revenue Service is satisfied with the conduct of the exchange.
In order to act as a qualified intermediary, a person or entity must not have a prior relationship with a taxpayer. Family members cannot offer this service, and neither can people like real estate specialists, lawyers, and accountants the taxpayer has worked with in the past two years. Qualified intermediaries are usually firms specializing in real estate transactions, as they have extensive experience with these types of transactions.
During the 1031 exchange, the taxpayer surrenders the property being sold to the qualified intermediary. If a property of like kind is located, the qualified intermediary arranges for the release of the surrendered property to a new buyer and the transfer of the new property to the taxpayer. The intermediary may hold funds in trust as part of the agreement as well. Processing the deal through an authorized third party allows the taxpayer to avoid payment of capital gains on the property being sold.
1031 exchanges are complex and must be carried out in precise accordance with the law. If mistakes are made during the deal, the taxpayer may end up paying for them, and that cost could be high. When selecting a qualified intermediary, it is advisable to use people who come highly recommended and have substantial experience with these types of property exchanges. Professional qualifications such as licenses to practice can be checked against the records of certifying organizations to confirm that the intermediary is indeed a member in good standing of the organization.
This term is also used to describe overseas banks in a special relationship with the Internal Revenue Service. These banks can accept deposits from American citizens and are required to report on them as well as withholding tax on interest earnings. This system is designed to prevent Americans from hiding taxable income overseas. The operation of this system underwent an overhaul in the early 2000s in response to scandals with overseas banks failing to perform their duties.