1031 account company needed?

Question

We are completing a 1031 exchange.  First property in CA, 2nd in Houston, TX.

Some friends say they have completed 1031 exchanges on their own and all you need is 'keep a paper trail of transactions'.

However, given the state change and also that we may be doing a construction exchange, I would think it is a better step to use a specialized service.  Do you agree?  And is it really that 'simple', if it's in the same state and a pretty straightforward exchange?

Additional question, is it better to find a company in TX or in CA to help with the process?

TIA!

Dave Foster · Answer

Account Closed, ABout the only way to DIY your exchange is if you're actually swapping properties and it is happening at one title company.  You cannot have actual or constructive receipt of the funds.  So even the act of directing your title company to wire the funds from the sale to the selling title company will violate that.  And in a deferred exchange you must by law use the regs under 1031 which include an assignment of rights with your QI.

There's a lot of good Qis our there.  The location really isn't much of a factor as they will have to start your exchange in CA and end it in TX.  1031 is a federal statute so it is performed the same in all states.

Bill Exeter · Answer

Hi Account Closed,

It is possible to complete a 1031 Exchange without a "professional" Qualified Intermediary.  However, it would require specialized documentation (not just your standard real estate documents), one of the other parties involved in the transaction to "act" as your "non-professional" Qualified Intermediary, concurrent closing of all the relinquished and replacement properties, and careful processing to ensure that you do not have unintended "constructive receipt" of your funds. You must be very careful here and know what you are doing.  It is not just a "do it with good documentation" kinda thing.

It is much simpler, safer and less expensive to just hire a good "professional" Qualified Intermediary;" one with government oversight to ensure they are operating in a safe, sound and secure manner.

Improvement 1031 Exchanges are much more involved, more complicated and have additional costs.  You need a good "professional" Qualified Intermediary to make sure that the entire Improvement 1031 Exchange is structured properly.

Bill B. · Answer

Account Closed

Maya, I don’t want to call your friends liars. But if they even had control of the money, let alone actually received the money, they didn’t do a valid 1031 exchange. You are required to use a Qualified Intermediary.

Try phillip’s recommendation above or try @Dave Foster. But make sure you contact them BEFORE closing or you won’t have a valid 1031 either.

Bill Exeter · Answer

Hi @Mark Brown,

You bring up an excellent point!  Less than 1% of Qualified Intermediaries have any kind of government oversight.  The 1031 Exchange industry has no regulatory body (although we have tried to become regulated many times).  Most of the Qualified Intermediary failures would have been prevented had they had some kind of government or regulatory oversight.

It is extremely important to include this line of questioning when interviewing potential Qualified Intermediaries.  Do not wait to ask these questions before it is too late. Many of the Qualified Intermediaries that failed had been in business for years, so length of time in the business is not enough.  You need to make sure they have some form of regulatory oversight like the Office of the Comptroller of the Currency, State Division of Banking, Federal Reserve, etc.

A large company or insurance is not enough.  Just look at what happened to the LandAmerica 1031 Exchange case.

Mark Brown · Answer

The thing with 1031 exchange companies is that pretty much anyone can hang out their shingle as a 1031 facilitator.  While the IRS has stringent rules on the procedural steps you must follow, there are virtually no rules or regulations on who can call themselves a 1031 company.  Not surprisingly, financial fraud involving 1031 exchange funds is one of the most frequent financial crimes out there. You want to give your "friends" or some company operating out of grandma's garage 250K or whatever of pure cash and trust that the money is still there for you to buy a replacement property a few months later? I would recommend finding a reputable company like First American that also maintains insurance on themselves in case an employee runs off to the Caribbean or something with the cash.

Dave Foster · Answer

Account Closed, The FEA is the industry support and marketing organization.  If you can write a check you can join.  So it's not a quality assurance designation at all.  They do have a CES designation (much like the  different designations of professional realtors) that attempts to provide a level of confidence.   Many good QIs are members.  Many good Qis are not.  Same with bad ones.  Your best bet is still going to be demonstrated expertise and longevity.  Talk to colleagues and friends who have done them.  Who did they use?  Here on BP you can actually converse with people who have worked with several different QIs from BP by visiting the reference section of their profile.

All the designations and oversight and requirements in the world will not stop a bad actor from acting badly.  Bernie Madoff and Enron pretty much demonstrated that  Find a QI that's been around for a while, has been used by colleagues and friends of yours, can answer questions of yours and "clicks" with you.  That company will do fine for you.  Do your homework and then trust yourself and your colleagues.  No need to live in fear.

Scott Wolf · Answer

Account Closed mentioned.

Account Closed · Answer

Thank you everyone for your input.  Does being an active member of the Federation of Exchange Accommodators (“FEA”) mean greater reliability for a 1031 exchange?

Bill Exeter · Answer

Hi @Naya,

No, not really.  I'm one of the founders of the FEA and I can tell you there are members of the FEA that are absolutely not reliable.

Glenna Wood · Answer

You simply can't do a legal 1031 on your own because you cannot personally touch the money. You must use a QI and their location with respect to the properties involved doesn't matter.

1031 account company needed?

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