Seeking help - started 1031 exchange now want to hire consultant / QI

Los Angeles County, California
1031 Exchanges
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Seeking help - started 1031 exchange now want to hire consultant / QI

Derek Gardner
Member since 2024 · 6 posts · 2 votes

OK, so I recently sold a local rental property and just went into escrow to buy a replacement. My friend convinced me to use him as a QI as he's done it before over the years and it would save me money. I'm second guessing that decision now and would feel a lot better if I paid someone to review things to make sure it is being done correctly since my friend does not do this as his day to day.


An agreement was signed prior to my sale, and assignment of the sale contract and escrow sent the proceeds to my friend. Now I am at the stage of negotiating a repair credit on the upleg and then removing contingencies.


I know this is an unusual request but is there anyone who is experienced with 1031 that I could hire to make sure I do this right any my friend doesn't misguide me and mess this up? Your name would not go on anything, just need someone to review and advise on best course(s) of action.

Also, not sure if there are nuances with California but experience with that state would be a plus as a noticed this: 

https://www.ftb.ca.gov/file/personal/reporting-like-kind-exc...



Thx!


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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y

@Derek Gardner. It sounds like two out of the three components of the 1031 exchange were in place at the closing.  As long as your friend has no business or family relationship with you, you have possibly started a correct 1031 exchange.  Whether or not it would pass with the IRS depends on language used in the agreement and the wordings in the settlement statement.  And whether notices of the assignment were posted properly.  

The problem with a friend is that your money is now their money.  If anything happens to them there is no protection for you.  A lawsuit, divorce, bankruptcy, death, - all could really jam up things and cause you to not only lose your 1031 exchange but the money they are holding as well!!

At this point in time you are stuck with them as your QI if you want to finish.  No QI would accept an official substitution of QI from a personal friend.   But consulting with you to make sure you're as proper as possible might be a possibility.  

I'll reach out via pm to give you more information and see if there's something we can do for you.

The 1031 Investor5137 Reviews
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  • Joe HomsBusiness Member
    Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
    2y

    @Derek Gardner looks like you have several moving parts here.  The QI is just there to receive the money from the first sale and pay the next, so that you are not taxed on that transfer.  They should have nothing to do with your up-leg property.  The up-leg repair credit is negotiated with your current Real Estate agent and the seller agent.  If there is a credit, then that will be handled in escrow.

    Yes, make sure that you try and use all the money from the sale of the first home and if there was a loan on the property it also needs to be replaced on the up leg.  I would seek CPA advise on this if you want to make sure you are not taxed on the sale excess (boot).

    Good Investing...

    [email protected]949-625-4533
    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    2y

    This is a tough one because even though their name isn't on it, if something goes south, are you going to go after them?

    Just so you have a frame of reference the cost of a 1031 Exchange is typically around $1,200. Not a lot of money.

    It is all about the transfer of the net proceeds and any outstanding loans. As long as it is the same or higher, typically you are fine. But this is why you hire someone that is experienced rather than a friend. That goes for any profession in any industry.

    1Reply
  • Derek Gardner
    OP
    Member since 2024 · 6 posts · 2 votes
    2y

    To clarify the property I sold I owned free and clear. I would likely buying the new property in cash for about 2X the proceeds of my previous sale. Even if it wasn't cash I would put down 100% of the proceeds.

    "This is a tough one because even though their name isn't on it, if something goes south, are you going to go after them?"

    No I would not. I would hire for them for their expertise to guide me on what I do. Not to do anything for me.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Derek Gardner. It sounds like two out of the three components of the 1031 exchange were in place at the closing.  As long as your friend has no business or family relationship with you, you have possibly started a correct 1031 exchange.  Whether or not it would pass with the IRS depends on language used in the agreement and the wordings in the settlement statement.  And whether notices of the assignment were posted properly.  

    The problem with a friend is that your money is now their money.  If anything happens to them there is no protection for you.  A lawsuit, divorce, bankruptcy, death, - all could really jam up things and cause you to not only lose your 1031 exchange but the money they are holding as well!!

    At this point in time you are stuck with them as your QI if you want to finish.  No QI would accept an official substitution of QI from a personal friend.   But consulting with you to make sure you're as proper as possible might be a possibility.  

    I'll reach out via pm to give you more information and see if there's something we can do for you.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
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