A Designated Entity refers to the party who is identified and set up to receive the “like-kind” property on behalf of the exchanger. This arrangement is often made to comply with the “no actual or constructive receipt” rule of Section 1031.

Section 1031 of the IRS tax code allows for the deferral of capital gains taxes when an investor sells an investment property and reinvests the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.

To qualify for this tax deferment, however, the investor (also known as the exchanger) cannot actually or constructively receive the proceeds from the sale of the relinquished property; if they do, the transaction becomes taxable. To comply with this rule, the exchanger must use a third party, known as a Qualified Intermediary (QI) or Exchange Accommodator, to hold the proceeds from the sale of the relinquished property and to acquire the replacement property on their behalf.

The designated entity would typically be the specific replacement property or properties that the exchanger identifies within the 45-day identification period following the sale of the relinquished property. These properties are designated in writing to the QI, and one or more of them must be acquired within the 180-day exchange period for the exchange to be fully tax-deferred.