The Exchange Process
PHASE 1 begins when the Exchange Agreement (E) is signed and the relinquished property is transferred to the Accommodator, also referred to as the Qualified Intermediary (QI), through an Assignment Agreement (A). The property is then sold to the buyer and the cash proceeds are deposited into an exchange account.
Under the current rules for a § (code) 1031 Exchange, the IRS mandates that an actual exchange must take place in each § 1031 Exchange transaction. The Exchanger must grant to the Qualified Intermediary their interest as seller of the relinquished property and their interest as Buyer of the replacement property.
Because the Qualified Intermediary becomes an actual principal in the transaction, a reciprocal trade is created, even when there are three or more parties involved in the exchange. If the Exchanger receives any of the proceeds from the sale of their relinquished property, those proceeds will be taxable.
The Qualified Intermediary will hold the proceeds from the sale in a separate exchange account until the funds are used to purchase the Exchanger’s replacement property. Also, there are legal documents to complete an exchange. The Qualified Intermediary will prepare these documents for each settlement officer handling the transaction.