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How to Choose a 1031 Qualified Intermediary

Updated on September 28, 2017
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Russell Fry is a highly experienced copywriter with millions of words and hundreds of successfully published articles under his belt.

Are you looking for a 1031 Qualified Intermediary? Here are seven questions you should be asking.

There is a new conversational trend taking place between everyone from realtors, investors, title companies and even the average everyday person who knows little to nothing about tax laws. At the centre of that trend lies Section 1031. As happens with any new catchphrase - namely ones involving nouns - some people have even turned it into a verb, such as: Let's 1031 that building for another." And though it isn't only meant for real estate, most discussions take it there.

With so much Section 1031 talk going about, it might be a good idea to gain an understanding of one critical aspect of this federal tax section: choosing a qualified intermediary (also known as a QI, an "exchange accommodator or "facilitator).

Closing the sale of a property can be more than chaotic, and many people overlook the importance of choosing a QI. You might see that their title reads "qualified" and figure it is exactly what it is - after all, are not they all the same thing? Qualified intermediaries are all the same, right? Well, you must be aware that the answer to that question is "no."

This guide is designed to educate you on how to choose a 1031 QI by choosing seven commonly asked questions and answering them for you. By learning these seven questions and the answers provided, you will be able to engage a 1031 facilitator as if you understand the game so that you are able to choose the right one for the job.

Before we continue, there is one thing you must understand right now: most qualified intermediaries are not regulated. Banks, insurance companies and stockbrokers all fall under a national standard or are federally supervised, but that is not the case here. Even though the IRS requires that a QI keep your 1031 exchange funds, they mostly are not bonded/insured nor hold a license giving them some special authority.

So, a word to the wise: be very careful who you choose to trust. With that said, here are seven things you can ask in order to make the choice easier.

1. How long have you been in business as a Qualified Intermediary?

As is with any business, the longer the Qualified Intermediary has been doing business, the better the chances are that he or she has plenty of know-how to get the job done. They should have a broad understanding of how to deal with exchanges and fully comprehend the laws and regulations that govern them.

2. Within the last five years, how many exchanges have you completed? Furthermore, what is the aggregate dollar amount of exchanges in each of these years?

If you divide each of the year's dollar amount by the total number of exchanges, you should reach an average. If it is less than the amount you wish to exchange, that is not a good sign.

3. What is the percentage of your business is traditional delayed/forward exchange?

This means "sell a property; 45 days to ID replacement properties; close within 180 days." These are more simple than complex types or 1031s which involve improvement or reverse exchanges.

Furthermore, there is no such thing as a right or wrong answer. Nevertheless, those QIs who aren't afraid to tackle more complex exchanges and have the numbers to show it will have better technical skill. Additionally, though they themselves may not hold licences, you can tell how good they are by who their CPAs and tax lawyers are.

Don't be surprised if many firms you check out offer these functions in-house. As for basic QI services, don't expect tax advice, but they can be of use if you ever face any tax issues.

4. Will you hold my funds?

It is highly advised that you require your funds be kept in a Segregated Qualified Escrow Account or a Segregated Qualified Trust Account. Don't even think about allowing the QI to place your funds in a low-cost option such as a commingled account, with the promise of paying you a high-interest rate.

5. Where will you be keeping my funds? Is it secure?

If you are looking for the best answer to this question, you should be hearing that the QI will keep the 1031 funds in a large, highly respected FDIC insured bank. Nevertheless, keep in mind that FDIC insurance is usually limited to $250,000 per each account holder. If there is any reason the health of the QIs bank choice is in question, you reserve the right to request that he or she holds the funds in another bank of your choice.

6. Am I allowed a written copy of your internal controls?

This is a crucial thing, for internal controls tell you what policies and procedures they have in place in order to protect your 1031 funds from fraud and/or theft by the firm's employees or anyone else. You should have a clear picture of what approvals, oversights and steps needed to release or move your money around.

No single employee should have the power to do so. And to be quite honest, the owner of the firm shouldn't either. Firms that are attempting to follow best practices will require your signature, along with a certain number of signed approvals within the firm. This makes it virtually impossible for just one employee to mess around with your 1031 funds.

7. Are you covered by insurance? If so, what is the company and how much does your policy cover?

If your funds are stolen or you are forced by the IRS to pay taxes because the firm made a mistake, the QI's insurance policy definitely matters, for it will be the deciding factor on whether you get your money back or not. At the bare bones, your funds should be covered by an Errors and Omissions (E&O) insurance and a fidelity bond.

© 2017 Russell William Fry


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