- All documents must be prepared & signed prior to the escrow closing.
- After the closing of sale in escrow, the qualified intermediary is required to place all funds into an interest bearing account.
- At this point, the exchanger has 45 days to identify a suitable replacement property. Identification of replacement property is satisfied by mutual acceptance & execution of a purchase & sale agreement between a seller & the exchanger.
- The qualified intermediary forwards all funds including the accrued interest to the escrow at closing to complete the transaction.
1031 Exchange Qualified Intermediary
A qualified intermediary (QI)
is any foreign intermediary (or foreign branch of a U.S.
intermediary) that has entered into a qualified intermediary
withholding agreement with the IRS. You may treat a QI as a
payee to the extent the QI assumes primary withholding
responsibility or primary Form 1099 reporting and backup
withholding responsibility for a payment. In this situation, the
QI is required to withhold the tax. You can determine whether a
QI has assumed responsibility from the Form W-8IMY provided by
the QI.
A payment to a QI to the extent it does not assume primary NRA
withholding responsibility is considered made to the person on
whose behalf the QI acts. If a QI does not assume Form 1099
reporting and backup withholding responsibility, you must report
on Form 1099 and, if applicable, backup withhold as if you were
making the payment directly to the U.S. persons.
QI Withholding Agreement
Foreign financial institutions and foreign branches of U.S.
financial institutions can enter into an agreement with the IRS
to be a qualified intermediary. A QI is entitled to certain
simplified withholding and reporting rules. In general, there
are three major areas whereby intermediaries with QI status are
afforded such simplified treatment.
The QI withholding agreement and procedures necessary to
complete the QI application are set forth in Revenue Procedure
2000–12 found in Cumulative Bulletin 2000–1 (Internal Revenue
Bulletin (I.R.B.) 2000–4). Also see:
Notice 2001–4 (I.R.B. 2001–2).
Notice 2001-43 (I.R.B. 2001-30)
Notice 2002-66 (I.R.B. 2002-42)
Revenue Procedure 2003–64, Appendix 3 (I.R.B. 2003–32).
PLEASE NOTE: IRC Section 1031 Exchanges
IRC 1031, Like Kind Exchanges involve business or investment
property which is exchanged for like kind property. Like Kind
Exchanges must not involve constructive receipt of cash for the
property relinquished. The use of a qualified intermediary can
facilitate the exchange using escrow accounts. This type of
intermediary promises to return the proceeds of the exchange to
the transferor of the property. The proceeds are used to
purchase replacement property of like kind. Real or personal
property must be replaced with real or personal property of the
same asset class to defer the gain.
The QI Withholding Agreement does not apply to these
transactions and the QI program is not responsible for
overseeing this activity.
Documentation
A QI is not required to forward documentation obtained from
foreign account holders to the U.S. withholding agent from whom
the QI receives a payment of U.S. source income. The QI
maintains such documentation at its location and provides the
U.S. withholding agent with withholding rate pools. A
withholding rate pool is a payment of a single type of income
that is subject to a single rate of withholding.
A QI is required to provide the U.S. withholding agent with
information regarding U.S. persons subject to Form 1099
information reporting unless the QI assumes the primary
obligation to do Form 1099 reporting and backup withholding.
If a QI obtains documentary evidence under the know your
customer rules that apply to the QI under local law, and the
documentary evidence is of a type specified in an attachment to
the QI agreement, the documentary evidence remains valid until
there is a change in circumstances or the QI knows the
information is incorrect. This indefinite validity period rule
does not apply to Forms W-8 or to documentary evidence that is
not of the type specified in the attachment to the agreement.
Form 1042-S Reporting
A QI is permitted to report payments made to its direct foreign
account holders on a pooled basis rather than reporting payments
to each direct account holder specifically. Pooled basis
reporting is not available for payments to certain account
holders, such as a nonqualified intermediary or a flow-through
entity.
Collective Refund Procedures
A QI may seek a refund on behalf of its direct account holders.
The direct account holders, therefore, are not required to file
returns with the IRS to obtain refunds, but rather may obtain
them from the QI.
U.S. Branches of Foreign Banks and Foreign Insurance
Companies
Special rules apply to a U.S. branch of a foreign bank subject
to Federal Reserve Board supervision or a foreign insurance
company subject to state regulatory supervision. If you agree to
treat the branch as a U.S. person, you may treat the branch as a
U.S. payee for a payment subject to NRA withholding provided you
receive a Form W-8IMY from the U.S. branch on which the
agreement is evidenced. If you treat the branch as a U.S. payee,
you are not required to withhold. Even though you agree to treat
the branch as a U.S. person, you must report the payment on Form
1042-S.
A financial institution organized in a U.S. possession is
treated as a U.S. branch. The special rules discussed in this
section apply to a possessions financial institution. (Notice
2000-11), as updated by Notice 2002-3.
If you are paying a U.S. branch an amount that is not subject to
NRA withholding, treat the payment as made to a foreign person,
irrespective of any agreement to treat the branch as a U.S.
person for amounts subject to NRA withholding. Consequently,
amounts not subject to NRA withholding that are paid to a U.S.
branch are not subject to Form 1099 reporting or to backup
withholding.
Alternatively, a U.S. branch may provide you with a Form W-8IMY
with which it associates the documentation of the persons on
whose behalf it acts. In this situation, the payees are the
persons on whose behalf the branch acts provided you can
reliably associate the payment with valid documentation from
those persons.
If the U.S. branch does not provide you with a Form W-8IMY, then
you should treat a payment subject to NRA withholding as made to
the foreign person of which the branch is a part and the income
as effectively connected with the conduct of a trade or business
in the United States.