A Qualified Intermediary (QI) is essential for the completion of a successful 1031 Exchange and care should be taken in the selection of your QI. Sometimes referred to as the Exchange Accommodator, the QI performs several important functions in the exchange process including:
- Coordination of the structure, process, and documentation of the 1031 Exchange
- Controls the proceeds from the sale of your Relinquished Property
- During the 45 Day Identification Period, maintains records of properties selected as possible replacements
- Releases funds for the purchase of the Replacement Property
- Conveys Replacement Property to the Exchanger by deed
- Maintains accurate accounting for the 1031 Exchange
According to IRS rules, no one related to you can act as the Qualified Intermediary; neither can anyone regarded as your ‘agent’ including:
- Your attorney
- Your CPA
- Your Broker
- Your Realtor
If an ‘agent’ has not served you in his/her professional capacity within the past two years, then he could act as your Qualified Intermediary. If 10% or more of your selected Intermediary Company is owned by your ‘agent’ such as your realtor or CPA, then that QI company is also considered to be your ‘agent’ and is generally disqualified.
Currently, there is no state or federal regulations governing the performance or conduct of Intermediaries and there are no licensing requirements. Select the Intermediary just as you would an accountant or attorney. You should look for:
- Experience and reputation in the legal, real estate, and title communities
- Talk to Escrow and title companies to get their opinions
- Select someone who is familiar with the tax code since other sections of the code may have a bearing upon your transaction.
- Security of your funds is important, so check safeguards during the period that they are held by the Intermediary.
- Be sure the QI has errors and omissions (E & O) and fidelity insurance.
- Compare fees that are charged for this Exchange service.
Usually fees are fairly similar, so select a QI who has knowledge and experience helping clients with exchanges. It is also important that the QI is able to coordinate the process smoothly and communicate well with you.
Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC
This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.
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Article Author: Grant ConnessGrant has written 6 articles for us.
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Joshua Dorkin
{ 2 comments… read them below or add one }
If you are planning to do a 1031 Exchange, please make sure to choose a qualified intermediary who provides transparency for the 1031 Exchange funds. Several qualified intermediaries have gone BK this year due to having invested the exchange funds poorly. Taxpayers lost their nesteggs and still owe the taxes! A good qualified intermediary opens a separate money market account for your exchange and you should receive the monthly statement from the depository bank.
In the past, we all looked to make sure a qualified intermediary had a fidelity bond and E&O insurance. Those instruments do nothing to protect from exchange funds being foolishly invested. You need to be able to monitor your nest egg the entire time it is held by the qualified intermediary.
Dorothy:
Great post! Our intermediary has had to adopt safety and security features after the “debacles” that shocked the industry the past 18 months. We let clients either select a bank of their choice for $1,250 to complete the exchange with a banker they have known for years, or for $750 we pay the client interest on their funds, establish a money market account, and let the clients utilize either the escrow division of Citigroup or Union Bank of California to micromonitor their segregated funds. For the ultraconservative we can have double signatures required so a taxpayer can demand signature in order to wire out of the money market.