How to Find Qualified Intermediary for 1031 Exchange
In the dynamic realm of real estate investing, success takes shape through diverse strategies and backgrounds. Yet, amidst this diversity, a shared key to achievement emerges the presence of a dependable team of advisors guiding the journey.
In this article, we discuss the role of qualified intermediaries and the indispensable guidance they provide to navigate the complexities of this endeavor. With all of the intricacies in real estate investing, going through it alone isn’t always an option; a qualified intermediary should be your ally.
What is a Qualified Intermediary in A 1031 Exchange?
A qualified intermediary creates the necessary documentation to initiate a tax-deferred exchange under Internal Revenue Code Section 1031. Their role includes safeguarding exchange proceeds while maintaining both principle and liquidity.
Beyond documentation, the qualified intermediary offers guidance, helps taxpayers understand the intricacies of a 1031 exchange, and ensures that closing statements accurately reflect the exchange's nature.
What Does a Qualified Intermediary Do?
A qualified intermediary (QI) plays a pivotal role in ensuring the success of a 1031 exchange, making the difference between a seamless process and potential complications.
Their tasks encompass three main areas:
Legal Agreements: QIs prepare essential legal agreements to structure the 1031 exchange correctly.
Funds Handling: QIs safeguard funds from the relinquished property's sale until they're required to acquire a replacement property.
IRS Compliance: QIs ensure the exchange adheres to the IRS rules, managing all property transfer and fund handling aspects.
QIs facilitate the entire 1031 exchange process, from the initial agreement to managing deadlines and preparing necessary documentation.
Their expertise ensures adherence to strict timelines, including the 45-day identification period and the 180-day closing period. Furthermore, a QI manages exchange funds, ensuring compliance and smooth transitions.
Selecting a 1031 Exchange Qualified Intermediary
With numerous QI options available, locating a suitable intermediary involves several strategies:
Seek referrals from your local escrow officer.
Gather insights from fellow investors within your network.
Use nationwide listings featuring QIs registered with regulatory entities such as the Federation of Exchange Accommodators.
Yet, the crucial task isn't merely locating a QI but effectively choosing the right one from your choices.
Tips on How to Find a Qualified Intermediary
When seeking a qualified intermediary for your 1031 exchange, several key aspects deserve consideration:
1. Experience Level
Evaluate the QI's experience and track record to gauge their knowledge and past performance. Inquire about the number of exchanges completed and recent volume, indicating a strong grasp of the exchange process.
2. Customer Service
Assess responsiveness and quality of customer service. This can be determined through interactions, responsiveness to inquiries, and available support.
3. Funds Handling
4. Costs and Fees
While cost is essential, prioritize a 1031-qualified intermediary with experience and suitable coverage for your exchange.
Look for QIs with insurance coverage, which safeguards your funds from fiduciary issues. Fidelity bond coverage and Errors & Omissions (E&O) insurance are indicative of a reliable QI. When selecting a qualified intermediary, a thorough assessment of these factors ensures a successful 1031 exchange process.
Who Can’t Act as Your 1031 Qualified Intermediary?
According to IRS regulations, your Qualified Intermediary (QI) cannot be a family member, employee, or anyone with a direct financial connection to you.
Even if a family member possesses financial expertise, they are ineligible to serve as your QI. This also extends to employees or individuals who've had financial ties with you within the past two years.
Key Questions to Ask Before Selecting a Qualified Intermediary
Here are the key inquiries to guide you in making an informed decision.
What is the tenure of the qualified intermediary's business operation?
Inquire about the qualified intermediary's tenure in the industry, as longer-established firms often bring greater expertise and understanding of exchange regulations.
How many exchanges have the QI completed in the past five years, and what is the combined value of these exchanges annually?
Ask about the number of exchanges completed in the last five years and the total value exchanged annually. This insight provides an average exchange value against your own amount.
How are my funds safeguarded during the process?
Ensure your funds are held in a Segregated Qualified Trust Account or Escrow Account within a reputable FDIC-insured bank, avoiding commingled accounts and overly attractive interest rates.
Where will my funds be securely held?
Confirm that funds will reside in a credible FDIC-insured bank. If concerned, you can request funds to be held in a different bank.
Can I obtain written documentation of your internal control practices?
Request a written copy of the firm's internal controls detailing procedures for protecting your funds against theft or fraud, ensuring rigorous oversight and multiple approvals.
What types and coverage amounts of insurance does the company possess?
Learn about the firm's insurance coverage, including fidelity bond and Errors & Omissions (E&O) insurance. Assess the coverage relative to the average 1031 funds on deposit for all clients to ensure substantial protection.
You ensure a reliable, secure, and well-informed partnership with your chosen 1031 accommodator by posing these essential questions.
Qualified Intermediary Fees Explained
Qualified Intermediaries (QIs) are categorized as institutional entities, often subsidiaries of banks or title insurance companies, or non-institutional independents. Fee structures differ between these types:
1. Institutional QIs
Typically charge setup and administrative fees ranging from $800 to $1,200, covering sale and replacement property transactions. Additional replacement properties may incur fees of $200 to $400.
2. Non-Institutional QIs
Generally, they charge setup and administrative fees from $600 to $800. Both QI types earn interest income from your sale proceeds. Institutional QIs offset higher setup fees with lower interest income percentages.
Non-institutional QIs offer lower setup fees but retain more interest income – a notable difference for larger escrow amounts held up to 180 days.
Securing Your Funds with a Qualified Intermediary
Given the lack of federal regulation in the QI industry and limited state mandates for licensing or insurance, securing your funds demands careful consideration. Safeguard your proceeds during your exchange with these steps:
Verify the presence of internal controls and audit mechanisms at your Qualified Intermediary.
Ensure that your funds are securely held in separate, FDIC-insured Qualified Trust or Escrow Accounts.
Inquire about online account viewing access.
Ensure liquidity of funds throughout the holding period.
Request daily or monthly statements for escrow accounts.
Due diligence on QIs is crucial for ethical and responsible choices, with many being part of the Federation of Exchange Accommodators. Your funds' safety is paramount.
Retrieving Funds from Your QI in a 1031 Exchange
During a 1031 exchange, circumstances can shift unexpectedly, leading to the need to retrieve funds from your Qualified Intermediary (QI). However, the process is strictly regulated to ensure compliance:
Penalties are in place to prevent the early release of exchange-held funds.
The U.S. Treasury Regulations Section 1.1031(k)-1(g)(6) (referred to as g (6)) dictates that funds can't be accessed before the exchange period concludes. To navigate this, exchangers must adhere to 1031 exchange regulations, including having a written agreement with their QI.
Addressing Bankruptcy Concerns with Your QI
While uncommon, instances of QI firms seeking bankruptcy protection do exist. In 2008, during the financial crisis, a significant title company and its subsidiary filed for bankruptcy, impacting investors' $450 million in 1031 proceeds.
The key lesson emerged from this: When arranging your Exchange Agreements, opt for segregated accounts to safeguard your funds. You proactively mitigate bankruptcy-related risks by ensuring your 1031 exchange funds are held separately from your QI.
Make Your Investment Journey Seamless and Secure
Navigating the realm of 1031 exchanges demands careful consideration and expert guidance. By partnering with a knowledgeable Qualified Intermediary, you ensure the protection of your funds and the smooth execution of your exchange.
Don't leave your investment to chance – ensure a seamless exchange process by partnering with a trusted and experienced intermediary. If you need help finding a QI or have other questions regarding your 1031 exchange options, give us a call.
At Precision Global, we're more than an investment firm– we're your trusted partner walking with you every step of the way. We put our money in alongside yours because we know that we can do a lot more together than we can on our own.
Please note that Precision Global Corporation (PGC) is not a certified public accountant (CPA) firm, and the information provided in this article should not be considered as professional tax advice. Content provided by PGC is for general informational purposes only.
Tax regulations vary by location and can change over time. It is recommended to consult with a qualified CPA or tax advisor who is knowledgeable about the specific tax laws applicable to your situation. They can provide personalized guidance tailored to your circumstances.
Precision Global Corporation does not accept liability for any actions taken based on the information presented in this article. For accurate and personalized tax advice, please consult a local CPA or tax professional.