The Simultaneous Exchange
In a simultaneous (also called concurrent) exchange, the old (“relinquished”) property and the new
(“replacement”) property are transferred concurrently. Investors performing such an exchange without the
benefit of a Qualified Intermediary may risk losing the tax deferred status of the transaction, especially
if there are three parties involved.
The Tax Court in Keith K. Klein v. Commissioner, 66 T.C.M. 1115 (1993), has' determined
one simultaneous three party exchange as a fully taxable sale. Mr. Klein's closing escrow instructions simply
assigned his rights to the proceeds from the sale of his property directly to the second closing for the
purchase of his replacement property. The Tax Court stated that Mr. Klein had unrestricted control over, and
thus the receipt of the funds in his transaction. Klein argued that the provision in his earnest money
agreement stated that the buyer would cooperate in structuring a tax deferred exchange. He felt that the
funds in escrow were already assigned to the seller of the replacement property and thus he had no control
over the funds. The Court indicated that the cooperation clause would not control the constructive receipt
issue. Unwary investors who do not utilize a Qualified Intermediary may be surprised to discover their
transaction does not qualify for tax deferral.
The use of a Qualified Intermediary involves the insertion of a fourth party who transfers ownership to the
proper entities and insulates the exchanger from constructive receipt issues on the proceeds. The Qualified
Intermediary becomes the accommodating party, thus protecting the Exchanger, buyer and seller. Although the
Qualified Intermediary does not hold any proceeds in a simultaneous exchange, they function in the important
capacity of creating a reciprocal trade; since they receive the relinquished property and acquire the replacement
property for the exchange. The Qualified Intermediary also controls the flow of the exchange funds.