15. What does a qualified intermediary do during an exchange?

The intermediary typically serves many functions during an exchange.

If the exchanger actually or “constructively” receives any or all of the proceeds of the sale of the relinquished property, the exchange will not be valid. (This rule would not apply to a percentage exchange, where the exchanger may receive the percentage of the sale proceeds that result from the percentage of the sale not included in the exchange.) In order to insulate the sale of the relinquished property, all funds are held in a restricted account.

To qualify for tax deferment under I.R.C. Section 1031, exchanges must be pursuant to a written exchange agreement. Some intermediaries provide this documentation, precluding the exchanger’s needs to engage separate legal counsel to prepare the exchange agreement. Significant additional costs are incurred if the exchanger must engage counsel to draft such documentation, A Troika provides the exchange agreement and all other required exchange documents at no additional cost.

Tax deferred exchanges must, in essence, constitute a reciprocal exchange of properties between two parties, notwithstanding the fact that there are almost always three, four or occasionally more than four parties participating in an exchange. An important role of the intermediary is to become the exchanger’s other party to the exchange. Technically, the exchanger is trading property with the intermediary; this explains why the relinquished property is conveyed to the intermediary first, and then to the ultimate buyer. Likewise, the replacement property is transferred first to the intermediary and then to the exchanger. Exchange transactions are often extremely complex. A good intermediary helps explain, confirm and manage all aspects of the transaction, facilitating document signatures, escrow closing and the timely cooperation and performance of the parties to the exchange.

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