One of the reasons the Internal Revenue Service may disallow 1031 tax-deferred treatment for a transaction and re-characterize it as a taxable sale (and subsequently assess a capital gains tax) is by taking the position that the Exchangor received or could have received the sale proceeds from the disposition of the Relinquished Property, i.e., constructive receipt and/or actual receipt.
The Treasury Regulations specifically allow for the use of a Qualified Intermediary, also known as an Accommodator. The Qualified Intermediary substitutes for or on behalf of the Exchangor as the seller or buyer, depending on which side of the transaction you are on, and holds the net sales proceeds from the sale of the Relinquished Property in a segregated Qualified Escrow Account until the Replacement Property transaction is ready to close. The Treasury Regulations contain certain safe harbor provisions that avoid the constructive or actual receipt issues when the Exchangor has retained and used a Qualified Intermediary.
The Qualified Intermediary must be an independent entity who is not the Exchangor, an agent of the Exchangor, or a related party of the Exchangor and who enters into a written “Like Kind Exchange Agreement”, Qualified Escrow Account Agreement and the Assignment, Acceptance, Notice and Direction to Convey documents. These 1031 tax-deferred, like-kind exchange agreements limit and restrict the Exchangor’s rights to the exchange funds from the sale of the Relinquished Property. It directs the Qualified Intermediary to acquire the Relinquished Property from the Exchangor, transfer it to the buyer, acquire the Replacement Property from its seller and transfer it to the Exchangor.