1031 Exchange - How to Decide Who to Use as a QI?

34 Replies

Originally posted by @Lauren Hogan :

@Ben Feder a QI is a qualified intermediary. They are unregulated and unbias third-party who hold money during a 1031 exchange. They provide a number of services & help during the exchange. 

 Is a QI similar then to an escrow?

@Steven May , That's a tough call.  The biggest problem with using equity to determine when to do a 1031 exchange is that the 1031 is designed to defer tax on profit.  And equity is not an indicator of profit.  If you've refinanced the property several times it is very possible that you may not have much equity at all but a ton of pent up profit that would be recognized in a sale.  By the same token you could have used shorter term financing or an aggressive program of paying down a loan and have tons of equity but not that much true profit.  So keep that in mind.

How much profit makes it worth it to 1031?  Again such a personal decision.  I've had clients decide to pay hundreds of thousands of dollars in taxes and forego a 1031 because they had other plans.  I've also had clients save less than a thousand dollars in tax but insist on doing a 1031 because "Its my money and I don't want to lose it to taxes".

Some general thoughts on when to do a 1031.

1. When the property is depreciated out and you want to purchase more depreciable basis

2. When you want to go from fewer to more assets - a diversification exchange

3. When you want to sell several assets and purchase fewer - a consolidation exchange

4. If you want to change classes of real estate - sell residential and buy commercial

5. When you want to sell and buy in another geographical area.

6. If you feel like appreciation has run it's course and want to switch to a cash flow asset 

7. When you want to move from active to more passive management or vice versa.

8. Looming Cap ex - 1031

9. deteriorating rents - 1031.

The list goes on and on.  But as you see it's more driven by market forces and the unique needs of the investor.  The 1031 is a powerful and flexible tool that can be brought to bear in all kinds of situations.

Rather than asking when is the right time to 1031, you almost would be better off asking the question, "given my goals and situation how can I use the 1031 in this scenario to my benefit".

Originally posted by @Vincent Incopero :

@Ahmed Let's be clear as crystal about WHEN attorney's can act as a 1031 qualified intermediary as THIS IS COMMON MISCONCEPTION. The United States Treasury covers this in Reg. 1.1031(k)-1(k)(2) for those of you who like reading. 

The Treasury Regulations state that someone who has acted as the taxpayer’s employee, attorney, accountant, investment banker, real estate agent or broker within two years prior to the date of the closing of the sale of the relinquished property is the agent of the taxpayer and is disqualified to act as the intermediary for that taxpayer. This means a seller of property CANNOT HAVE THEIR attorney, real estate agent, etc. hold their proceeds if they intend to complete a 1031 exchange. Also DISQUALIFIED ARE ALL THE ATTORNEY'S in the same firm as the seller’s attorney and any real estate agent in the same brokerage as the seller’s real estate agent. THERE ARE TWO EXCEPTIONS TO THE DISQUALIFICATION. 

BOTTOM LINE - ALWAYS SELECT/ENGAGE  an unrelated 1031 Intermediary company. Any extra work to do this is sure to be less than that of an IRS challenge or the complications and resulting tax implications from a failed 1031 exchange. 

Thank you so much for posting this, we get this all the time & it really needs to be unrelated.   

 

another way to go would be to setup a nonprofit,

donate the asset and pay no property taxes,

pay no income taxes, pay no state taxes, etc.

and work for the nonprofit for long term wages

on a mission to help the housing crisis :)

I used Dave Foster (referred to him by others on biggerpockets) for our first 1031, which required a lot of handholding.  I was very pleased with the service and the price.

Originally posted by @Lauren Hogan :

Looking for advice on how to select/choose a QI during a 1031 exchange? For those of you that have successfully completed a 1031, did you use a 1031 company or did you work directly with a QI or did you work with bank that had a QI? 

I used Dave Foster's company and couldn't be happier that I did. Why? There were a lot of reasons, but the most important one was for the security of my funds. Their company provides a competitive advantage when it comes to the safety of your money that no other company provides (at least none of the other ten companies I contacted provided). I would highly recommend contacting him directly to ask him about it. Also, Dave Foster is every bit as sophisticated an investor as some of the most seasoned professionals here. 

Hi @Lauren Hogan

There are a few Qualified Intermediaries that are licensed, regulated and audited.  Granted, less than 1% of "QI's" today have any kind of government oversight.  Investors searching for a QI should look for QIs that have some type of regulatory oversight to ensure they are dealing with a QI that is operating in a safe and sound manner.  They hold way too much money on behalf of clients to trust anyone else. 

@Ben Feder To expand on @Lauren Hogan 's response. A Qualified Intermediary, or QI, is a key component of a 1031 exchange transaction that falls within IRS safe harbors. 

I know that technical definition may just raise a whole new set of questions, so to preempt those...

When doing a "deferred 1031 exchange" in which you sell one property and only at later date acquire the replacement property, the taxpayer may not receive (or constructively receive) the proceeds of the initial sale. The QI's role is to hold the sales proceeds, pursuant to IRS regulations, so that they are not deemed received by the taxpayer. 

Of course, the role of the QI has evolved with some of them enhancing your 1031 exchange experience and outcome in infinite ways - as outlined by @Michael Skoczylas , @Bill Exeter , and @Dave Foster .

Originally posted by @Bernard Reisz :

@Ben Feder To expand on @Lauren Hogan 's response. A Qualified Intermediary, or QI, is a key component of a 1031 exchange transaction that falls within IRS safe harbors. 

I know that technical definition may just raise a whole new set of questions, so to preempt those...

When doing a "deferred 1031 exchange" in which you sell one property and only at later date acquire the replacement property, the taxpayer may not receive (or constructively receive) the proceeds of the initial sale. The QI's role is to hold the sales proceeds, pursuant to IRS regulations, so that they are not deemed received by the taxpayer. 

Of course, the role of the QI has evolved with some of them enhancing your 1031 exchange experience and outcome in infinite ways - as outlined by @Michael Skoczylas , @Bill Exeter , and @Dave Foster .

Thank you! Very helpful. 

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