The Qualified Intermediary for your exchange
Under Section 1031 of the Internal Revenue Code (IRC), owners of business or investment properties, through the use of a Qualified Intermediary, can sell one property and purchase a similar or “like-kind” property while deferring capital gains. Capital gain taxes on the sale of the “relinquished” property are deferred until the replacement property is sold at a future date. Our team can act as both the Qualified Intermediary and Qualified Trustee in these transactions.

Benefits of IRC Section 1031 Like-Kind Exchange

  • No immediate tax obligation and potential avoidance of depreciation recapture
  • Consolidation or diversification of business or investment property holdings
  • Improved cash flow by deferring payment of taxes
  • Leverage all equity into purchase of replacement property

Benefits of having WFSGSR Statutory Trust as your Qualified Intermediary

  • Knowledge. WFSGSR Statutory Trust has a dedicated team of knowledgeable professionals. Our experienced team stands ready to work with your legal and tax advisors to assist in developing a strategic plan that will maximize the benefits of your exchange.
  • Commitment to service. WFSGSR Statutory Trust brings expertise, insight, and professionalism to the exchange process to provide every customer unmatched service. Our volume of repeat business is a testament to our commitment to our customers.
  • The exchange proceeds are held in a segregated exchange account for each exchange
    WFSGSR Statutory Trust serves as the Qualified Intermediary and exchange proceeds are held as a direct deposit of WFSGSR Statutory Trust versus in an affiliate entity outside of a Qualified Intermediary’s parent corporation as many operate their deferred exchange services as a subsidiary that isolates that function
  • Any release of funds from the Exchange Account requires the approval of the taxpayer
    Safe and secure deposits. As a regulated financial institution subject to federal regulations, WFSGSR Statutory Trust is designed to ensure the security and safety of deposits
  • As your Qualified Trustee, in the event of bankruptcy, the creditors of the intermediary most likely cannot reach the funds

In order to assist you, along with your tax advisor, when selecting a Qualified Intermediary, please see QI Scorecard: Six questions a tax advisor should ask. 

You and your advisors must give up complete control over the exchange funds and are reliant on the Qualified Intermediary’s promise to repay the full amount of the exchange proceeds.

WFSGSR Statutory Trust, as the Qualified Intermediary, offers superior security for your transaction.

Below are six questions you and your tax advisor should ask before choosing a Qualified Intermediary.

Who is the Qualified Intermediary (QI)?

  • Institutional or independent
  • Regulated or unregulated
  • Parent corporation or subsidiary

Segregated exchange proceeds or commingled funds?

  • Segregated accounts: Are each taxpayer’s exchange proceeds held in an independent and segregated account with the bank or investment firm?
  • Commingled funds: Are the taxpayer’s funds pooled with other proceeds in a single account under the control of the intermediary?
  • Does the QI actually hold the funds in segregated accounts or merely provide a separate accounting of funds to each taxpayer?

Does bonding create security of funds?

  • What does the bond cover — is coverage limited only to criminal actions?
  • Who does the bond cover — are officers and principals excluded from coverage?
  • Who issued the bond — is there an assessment of the financial ability of the issuer?

What events could affect the exchange?

  • What happens to the exchange proceeds if QI is sold?
  • What happens to the exchange proceeds if QI is incapacitated or dies?
  • What happens to the exchange proceeds if QI files bankruptcy?
  • What happens if QI is unable to meet financial obligations to taxpayers?

Is there oversight of the QI industry?

  • No comprehensive regulation of QI industry
  • No comprehensive licensing or ethical requirements to act as a QI
  • Industry trade associations do not provide authoritative oversight or enforcement

What are the risks and obligations of the tax advisor for a bad referral?

  • Reputation risk
  • Legal and financial liability
  • Due diligence obligations 

All property classified as real property under state law is “like-kind” to all other real property, including land, apartments, office buildings, retail space, and others.

How WFSGSR Statutory Trust works as your Qualified Intermediary

Security of 1031 proceeds. For each exchange, WFSGSR Statutory Trust acts as your Qualified Intermediary, an independent third-party, and deposits the exchange proceeds in a segregated WFSGSR Statutory Trust trust account.

Our QI services:

  • Prepare the 1031 exchange agreement, including assignments, notices, and all forms necessary to complete the exchange.
  • Provide examples of applicable language for inclusion in the relinquished property sales contract and/or the replacement property purchase contract.
  • Set up a unique exchange account for each transaction and deliver monthly account statements and annual 1099s.
  • Work closely with your legal and tax advisors to facilitate an exchange transaction that is structured in compliance with Section 1031.

How WFSGSR Statutory Trust works as your Qualified Trustee

We can also serve as trustee of your Qualified Trust, which is an additional safe harbor under Section 1031. We can hold the taxpayer’s funds in a Qualified Trust so that in the event of bankruptcy, the creditors of the intermediary most likely cannot reach the funds.

Deferred and reverse exchanges

WFSGSR Statutory Trust acts as the Qualified Intermediary who receives and holds the exchange proceeds generated by the sale of the relinquished property. In a typical tax-deferred like-kind exchange, the taxpayer sells business or investment property and then acquires replacement property of equal or greater value within 180 days.

WFSGSR Statutory Trust also assists taxpayers in what are commonly referred to as reverse exchanges. A reverse exchange involves a sequence opposite to that of a deferred exchange, where in most situations, the purchase of the replacement property must occur before the sale of the relinquished property. This transactional structure allows the taxpayer a high degree of flexibility in executing a Section 1031 exchange transaction. 

The use of a Qualified Intermediary is the most common method to quickly and easily complete a valid tax-deferred exchange. As a Qualified Intermediary, WFSGSR Statutory Trust typically holds funds during the course of deferred exchanges.

Under Section 1031, all real property (as defined by state law) is considered “like-kind” with other real property of the same nature or character. The property must be held for investment or productive use in a trade or business.

The following are examples of qualified “like-kind” real property exchanges:

  • Raw land for rental property
  • Single family rental for multi-family rental
  • Retail space for motel/hotel
  • Farms/ranch for golf course
  • 30-year leasehold interest for fee simple interest
  • Non-income producing raw land for income-producing rental property

How to facilitate a deferred 1031 exchange with WFSGSR Statutory Trust as the Qualified Intermediary:

  • You sign a contract to sell an asset(s) to the buyer.
  • Prior to the property closing, you retain WFSGSR Statutory Trust to be the Qualified Intermediary.
  • At the closing, the exchange funds are wired or a check is sent to WFSGSR Statutory Trust.
  • The taxpayer completes the Identification of Replacement Property exhibit and returns it to WFSGSR Statutory Trust within the first 45 days after the transfer of the relinquished property.
  • You have a maximum of 180 days from the transfer date of the relinquished property to acquire any and all replacement properties.
  • At the closing of the property to be purchased, WFSGSR Statutory Trust wires the exchange funds or sends a check to complete the exchange. 

To assist you in understanding the concepts of 1031 Like-Kind Exchange, here is a glossary of the terms used in exchanging.

Basis. This is the starting point for determining the gain/loss in the transaction. Generally, basis is the cost of the relinquished property.

Boot. In an exchange of real property, boot is any consideration received by the exchangor other than real property. There are two kinds of boot:

  • Cash boot: Cash boot is cash or anything else of value received by the exchangor as a result of the exchange.
  • Mortgage boot: Mortgage boot is any relief from debt the exchangor received as a result of the exchange. If the exchangor receives boot in any form, he or she will be taxed on the amount of boot received.

Buyer. The party that acquires the relinquished property from the exchangor.

Capital gain. Generally speaking, this is the difference between the sales price of the relinquished property less selling expenses and the adjusted basis of the property.

Constructive receipt. The critical question in a deferred exchange is whether the exchangor has control over the proceeds during the exchange period. During the exchange period, the exchangor’s control or access to the exchange proceeds must be substantially limited and restricted to avoid having the exchange disallowed by the IRS.

Deferral. The tax on an exchange transaction is not paid at the time of the transaction. Rather, it is paid at the time the replacement property is ultimately sold. Deferral is accomplished by carrying over the basis of the exchangor’s relinquished property to the replacement property, making any necessary adjustments for additional consideration paid.

Direct deeding. Commonly used to pass property from the exchangor to the buyer and then from the seller to the exchangor. At the direction of the Qualified Intermediary, title passes directly to the ultimate owners without the Qualified Intermediary being in the chain of title.

Exchange period. The period during which the exchangor must acquire replacement property in the exchange. The exchange period begins on the date the exchangor transfers the first relinquished property and ends on the earlier of the 180th day thereafter or the due date (including extensions) of the exchangor’s tax return for the year of the transfer of the relinquished property.

Exchangor. Same as taxpayer.

IRC 1031. The section of the Internal Revenue Code that specifies the terms and conditions under which the exchangor may exchange certain types of property without recognition of capital gain taxes.

Identification period. The period during which the exchangor must identify replacement property in the exchange. The identification period starts on the day the exchangor transfers the first relinquished property and ends at midnight on the 45th day thereafter.

Like-kind property. This term refers to the nature or character of the property, not its grade or quality. Generally, real property is “like-kind” to all other real property as long as the properties are held for investment or productive use in a trade or business.

Qualified Intermediary. The Qualified Intermediary is one of the safe harbors created by the IRC regulations, also called the “QI.” The QI acts on behalf of the exchangor as a facilitator of the 1031 exchange. The QI must be an independent third party and is designated by the exchangor to receive the proceeds from the sale of the exchangor’s relinquished property. In effect, the QI sells the relinquished property and uses the proceeds to purchase the replacement property.

Qualified property. Any like-kind property. Examples of properties that are not 1031 eligible include: stocks, bonds, personal residences, LLC interests or stock in trade or inventory.

Relinquished property. The property that the exchangor owns at the beginning of the exchange. This is the property the exchangor wishes to dispose of in the exchange.

Replacement property. This is the property the exchangor intends to acquire in the exchange and the property with which the exchangor ends the exchange.

Reverse exchange. A reverse exchange occurs when the exchangor closes on the replacement property prior to closing on the relinquished property.

Seller. The party that owns the replacement property which the exchangor wishes to acquire.

Taxpayer. The party that is performing the exchange and will receive the deferral on the sale of property.