The 1031 Exchange: Qualified Intermediary Requirements for California

The 1031 Exchange: Qualified Intermediary Requirements for California

In previous articles, we’ve detailed the benefits associated with performing a 1031 Exchange, such as how it affords you the opportunity of differing capital gains taxes when selling your investment property, for instance.

However, the flip side to this is that you must carefully follow all of the rules and regulations it requires.

Of course the first step toward doing this involves knowing which rules and requirements are being placed on you, the investor.  

For instance, among these rules and regulations, there is something called the qualified intermediary clause.  

So let’s go over it in detail below. But first: What is a qualified intermediary?

The Qualified Intermediary Function

The concept of a qualified intermediary is built on the premise that a well-trained third party serves to ensure all required documentation is properly executed.

A qualified intermediary is: not the taxpayer (or other disqualified person). Rather, they are someone that enters into a written agreement (called an exchange agreement) with the taxpayer.

The qualified intermediary’s responsibilities include:

  • Acquiring the relinquished property from the taxpayer
  • Transferring the relinquished property to the buyer
  • Acquiring the replacement property from the seller
  • Transferring the replacement property to the taxpayer


Qualified Intermediary Requirements for California

California has legislated additional rules regarding qualified intermediaries. Rules for qualified intermediaries that are specific to the Golden State include, but aren’t limited to:

  • Maintaining an errors and omission policy of not less than $250,000 (or depositing cash, securities or letters of credit in an account designated for the same purpose)
  • Being required to withhold an amount equal to 3 and 1/3 percent of the sales price of any California property as contingency should the exchange not be completed
  • Maintaining a bond in the amount of $1 million, depositing an amount of cash or securities or irrevocable letters of credit in an amount not less than $1 million, or depositing all exchange funds in a qualified escrow account or trust account


Other 1031 Exchange Rules Specific to California

1031 Exchange rules specific to California aren’t limited to the qualified intermediary function. For instance, the state has a “clawback” requirement for California property sold in a 1031 exchange and replaced with an out-of-state replacement property (per California FTB Publication 1100 Irev 2007, section F). It states that non-residents are required to file a nonresident income tax return in the year the replacement property is sold in a taxable disposition.


1031 Exchange and Inco

With so much fine print, it’s best to contact professionals who can guide you throughout the entire 1031 Exchange process. After all, it’s your money! For expert guidance, give the solution managers at Inco a call today at 562-296-1362.