Many investors use 1031 Exchanges to defer capital gains tax as they transfer their invested capital from one investment property to another. A qualified intermediary (QI) is a third-party facilitator who plays a critical role in executing a 1031 Exchange.
According to Section 1031 of the Internal Revenue Code, if you conduct a transaction without engaging a qualified intermediary, the IRS may not consider your exchange compliant, meaning the transaction is ineligible for tax deferral. Simply put, you must entrust these professionals to manage the profits from your real estate assets. Yet, there are no federal regulations to determine who can or cannot become a qualified intermediary.
You may wonder, “how do I find a 1031 Exchange qualified intermediary near me?” and “how can I make sure they are competent professionals?” This article will outline where to find the best qualified intermediary in your area, which questions to ask them, and much more, so you can find the best person to conduct your 1031 Exchange.
Why Do I Need A Qualified Intermediary?
A qualified intermediary – also called an accommodator or exchange facilitator – is a professional who provides compulsory 1031 Exchange services mandated by the Treasury Regulations.
As an independent party, they facilitate the exchange funds from a relinquished property to a replacement property. In the eyes of the Internal Revenue Service (IRS), an investor doesn’t actually sell their property. Instead, the QI sells the relinquished property and uses the sale proceeds to purchase a replacement property, allowing the taxpayer to take advantage of deferred capital gains taxes. The accommodator’s responsibility is to manage the investor’s exchange funds during the property exchange.
Where Can I Find Qualified Intermediaries?
There are plenty of companies that provide 1031 Exchange services, including qualified intermediaries. Here are some common ways to find a qualified intermediary.
1. Search For a Professional Qualified Intermediary Service Online
The most common way to find a qualified intermediary in your area is to search “1031 Exchange qualified intermediary near me” on Google. The search results will pull up a list of QIs to choose from. But now you know who they are, how do you comb through the options to select the right one for your exchange?
Here are a few things to check on their websites:
- The QI’s qualifications
- The QI’s experience
- Reviews from past customers
Alternatively, try searching for lists of recommended providers online to learn about the pros and cons of each qualified intermediary from an objective point of view.
2. The Federation Of Exchange Accommodators
The Federation of Exchange Accommodators (FEA) is a national association that represents professionals facilitating like-kind exchanges under Internal Revenue Code 1031. FEA members include QIs, their legal and tax advisors, and other affiliates that provide 1031 Exchange services.
Qualified intermediaries can become certified by the FEA through its Certified Exchange Specialist (CES) program. To enter the program, a QI must have at least three years of professional experience operating as a qualified intermediary, a clear criminal record, and their exchange business must adhere to Treasury regulations.
Participation in the CES program does not necessarily imply that the professional is the best fit for your exchange, but it eliminates novices and those who may be negligent in 1031 Exchange proceedings.
3. Ask For Referrals
Reach out to your personal and professional spheres to ask for the names of competent, qualified intermediaries with whom those in your network have had successful dealings.
Certified public accountants and real estate lawyers have often encountered 1031 Exchanges in their careers and can likely recommend more than one to you. If the other party in the transaction has completed the exchange process in the past, they may offer some leads.
If you feel in over your head at the prospects of finding a trusted and proficient qualified intermediary for a commercial real estate exchange, the team at NNN Deal Finder is here to assist you. Get in touch with our experts who can guide you through the process of a 1031 Exchange and support you every step of the way.
What Are The Requirements Of A Qualified Intermediary?
There are no federal regulations, licenses, or requisite educational standards required to become a qualified intermediary. Simply put, a QI must not be what the IRS rules as “unqualified” to be deemed eligible. The internal revenue code stipulates that ‘agents’ who have served the taxpayer in a professional capacity during the two years prior to the exchange are disqualified from accommodating a property exchange for taxpayers. According to the IRS, an agent could be an accountant, a realtor, or a real estate attorney.
The only guidelines the IRS has prescribed for QIs are as follows:
- You cannot serve as your own qualified intermediary.
- Your relatives cannot be a qualified intermediary for your exchange.
- You cannot use an agent who has acted for you in a professional capacity over the past two years.
Beyond these directives, almost anybody can be your 1031 Exchange qualified intermediary. Therefore, performing thorough due diligence on the QI selected to execute the exchange is an essential task for investors. The questions below can help you navigate the pool of potential QIs and narrow your options to find the perfect professional for the job.
What Questions Should I Ask Before Choosing a Qualified Intermediary?
After finding potential QIs and researching their services and company background, you’ll have a short list of a few contenders. But we don’t have sufficient information to move ahead yet. Most investors will meet with their QI to learn more and discuss the deal, which is an excellent time to get to know your prospects and ask clarifying questions.
This section comprises a series of questions highlighting the important angles from which you should approach engaging a QI. That way you’re in good stead to find an experienced, trustworthy, and competent exchange facilitator to command your property exchange.
How Long Has the Qualified Intermediary Been in Business?
Generally, the longer the qualified intermediary has been in business, the better. Regular and prolonged experience facilitating exchanges usually comes with a greater handle on the laws and procedures involved in a 1031 Exchange. Note that just because a company has been conducting tax-deferred exchanges for 20 years does not mean all its employees have.
The FEA requires all QIs to have practiced in the field for at least three years. Three to five years is a good starting point, and up to ten years is even better.
Another good question to ask is how many exchanges your QI has done in recent years. An accommodator that regularly practices will likely be more up-to-date with the current regulatory framework. Between five and ten recent exchanges is usually considered a decent amount.
What Type Of Exchanges Does The QI Have The Most Experience With?
There are a variety of exchanges you can do, including construction and a reverse exchange. Each type has its own set of rules. Therefore, the answer to this question will be more or less weighted depending on the nature of the 1031 Exchange you wish to conduct.
A firm that has done a range of 1031 Exchanges likely has a better grasp on the procedural technicalities. While it may not be strictly necessary for investors completing a straightforward exchange to ask this question, it will be valuable for those doing a reverse exchange or other alternative property exchange.
A good indicator of experience includes CPA qualifications and the expertise of tax attorneys affiliated with the firm. You might want to select a company with in-house services such as tax advice – while not a mandatory requirement for QIs, a tax advisor may be invaluable should you encounter any tax issues down the line.
How Will My Funds Be Held?
Some qualified intermediaries offer low-cost options with high interest rates when you choose a blended account to hold your exchange funds. However, opting for a Segregated Qualified Trust Account or a Segregated Qualified Escrow Account can offer better protection for your capital.
Where Will My Funds Be Held?
Reputable FIDC-insured banks are a great place to store your sale proceeds from the relinquished property. Most account holders get coverage up to $250,000 in insurance. If you have any concerns over the bank your QI has chosen to store the funds, you can request that the funds get deposited in another bank of your choosing.
Is There a Written Copy Of Internal Controls?
A firm’s internal controls are a document that guides the internal policies and processes safeguarding your funds from theft or fraud by the firm’s employees. With them, you can learn about the organization’s process, including approval, oversight, and how to release your money.
Make sure that no individual working in the company has the authority to singularly handle your money. A good practice is to obtain your signature, plus a series of written approvals from the company agents before your money is moved or released. This makes it more difficult for one or two employees to access the funds illegally.
At the very least, the organization should conduct background checks on employees. Any established and serious QI firm should honor its fiduciary responsibilities and gladly provide a copy of its internal code. Failing to do so may be seen as a red flag and treated accordingly.
What Type Of Insurance Do You Have?
If the IRS rules that you must pay taxes on the exchange, and this direction results from negligence on the QI’s behalf, the organization’s insurance will protect you. Further, insurance policies will cover you against your money getting stolen.
At the very least, your account should be protected by fidelity bond coverage – covering you against theft and fraud – and Errors and Omissions (E&O) insurance, which protects you from gross negligence or methodical errors. You might find it beneficial to look at how this coverage compares to the average deposited amount by other 1031 Exchangers to determine how far the organization’s insurance will safeguard your funds.
How To Gauge Your Protection
Request the firm’s aggregate dollar amount of all the exchanges they have handled recently. Let’s say this amount totals $240 million over two years. If we assume the QI holds the funds for an average of 120 days (365/3), the total of the 1031 funds deposited would be $80 million (240/3). If your QI offers $1 million in fidelity bonds and $250,000 in E&O insurance, it’s comparatively little protection against $80 million.
Is The 1031 Exchange, Exchange Qualified Intermediary Near Me?
Some excellent qualified intermediaries work nationally, though it’s advantageous to work with the best accommodator you can find in your region. Regardless of the type of exchange you want, there are numerous advantages to working with somebody who knows your local market.
For example, if you perform a deferred exchange – the most common type of exchange – you must identify a replacement property within 45 calendar days of relinquished property sale and close on the deal within 180 days of the transaction. Should you encounter any issues with these time limits, a local qualified intermediary will likely be able to point you in the direction of somebody who can help you close the deal quickly.
More technical 1031 Exchange operations also benefit from a local QI. For instance, reverse exchanges – where you purchase the replacement property before selling the relinquished property – or an improvement exchange where the construction must be completed by day 180 to be eligible for tax deferral. A local professional can advise you on strategic pricing methods or guide you to a dependable contractor to complete the job on time and ensure full tax deferral benefits.
Qualified Intermediary Fees
The fees charged by qualified intermediaries vary between firms. Understandably, an investor may want to keep costs associated with the 1031 Exchange low.
Institutional qualified intermediaries typically charge fees for setting up the exchange services and administering the process. These fees cover the cost of selling the relinquished property and purchasing the replacement property and usually range between $800-$1000.
As a general rule, you shouldn’t be paying top dollar for a qualified intermediary unless you receive premium service.
Local Qualified Intermediary Administrations
Another factor to consider when you select your QI is whether there are any state laws or regulations that govern a QI’s business practices. The following states have local laws that oversee qualified intermediaries’ professional directives:
- California
- Colorado
- Connecticut
- Idaho
- Maine
- Nevada
- Oregon
- Virginia
- Washington
You’ve Chosen A Qualified Intermediary: What’s Next?
With a QI under your wing, the exchange will officially commence once you both sign a written agreement. It’s a good idea to make sure you know who you’d like to provide the exchange services then sign the contract before you sell the relinquished property.
As the exchanger, you and your agent must not come in contact with the sale proceeds of the relinquished property. Instead, profits should get sent directly to the closing agent, who will transfer them to the qualified intermediary. Send any relevant documents regarding the replacement property to your QI and ensure they get signed before closing on the deal.
Final Thoughts
A qualified intermediary is a crucial component of your 1031 Exchange – especially when it comes to complex procedures. But with no federal laws regulating their activities, it’s important to ensure you perform due diligence before engaging with one.
Knowing which questions to ask your QI is the best way to ascertain you have a competent and experienced professional providing exchange services. That way, you can move forward with confidence that your exchange is in safe hands and that your funds are financially protected.
If you find the process of hunting for the perfect 1031 Exchange qualified intermediary overwhelming, NNN Deal Finder is here to help you. Our dedicated experts will guide you through the entire process of your 1031 Exchange and can help you find the best qualified intermediary near you. Get in touch with us today to learn more about a 1031 Exchange.