Use the Right Professional in Your 1031 Exchange

Okay, here’s another mistake I’ve seen more than one 1031 exchange investor make. Quite honestly, I don’t view this as their fault. As I’ve mentioned before, the rules surrounding 1031 exchanges can be confusing and that’s why it’s important for an investor to work with experienced professionals to help them successfully complete a transaction.

Those professionals include the Financial Advisor, CPA, Qualified Intermediary (QI), Real Estate Agent and Attorney.

Wait …Qualified Intermediary? QI?

You probably recognize all the others, but chances are, you’ve not heard of the Qualified Intermediary, or QI. They go by other equally obscure names like Accommodator and Facilitator. And it’s because these names are foreign to most investors, that so many mishaps occur with 1031 exchanges.

Who is a Qualified Intermediary (QI)?

As defined by Treasury Regulation §1.1031(k)-1(g)(4), a Qualified Intermediary (QI) is a person who:

• Is not the taxpayer or a disqualified person;

And a QI is one who enters into a written agreement with the taxpayer (the exchange agreement) under which the qualified intermediary:

• Acquires the relinquished property from the taxpayer;
• Transfers the relinquished property to the buyer;
• Acquires the replacement property from the seller;
• Transfers the replacement property to the taxpayer.

Why is a QI so important?

IRS rules prohibit an investor from ‘receiving funds’ and only permit a third-party Qualified Intermediary to do so. There are no exceptions to this rule. If at any time the 1031 exchanger has possession of distributed funds from the relinquished property, they forfeit their ability to complete the exchange.

Obviously, this can have a devastating impact on the investor, as the net proceeds from the sale are no longer protected by a 1031 exchange’s tax-deferral benefit and are now subject to capital gains tax.

How do you select the right QI?

As with any profession, there are individuals who have more experience and better reputations than others. This holds true with Qualified Intermediaries. It’s interesting to note that the other professionals I mentioned earlier have associations or regulatory bodies that monitor their licenses and activities.

QI’s, on the other hand, don’t have any similar oversight. Other than a handful of states which have passed some legislation to regulate the industry, there is currently no regulation from the federal government. That’s concerning because lack of regulation can lead to mistakes, and that’s why it’s important for an investor to exercise proper due diligence when selecting a QI.

Here are several essential qualities you should look for in a Qualified Intermediary:

• Experience
• Comprehensive Exchange Agreements
• Transparency
• Fund Security
• Insurance/Bonding
• Compliance

If you need help identifying an experienced and reputable QI, I can happily assist you in finding one.

You can read more about Qualified Intermediaries in my ebook, 7 Common Mistakes Novice 1031 Exchange Investors Make and How to Avoid Them.

If you have any questions, please feel free to contact me.