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Qualifications of a Qualified Intermediary

For investment property owners using a 1031 exchange to sell a property, the IRS generally requires that a Qualified Intermediary (QI) be used to facilitate the exchange. This is often a point of confusion for many investors, as they may not be familiar with the role of a QI or the qualifications they should consider when selecting one. This post will help you understand the QI's primary responsibilities and the characteristics you should look for in finding the right QI for your exchange.

What is a QI?

A Qualified Intermediary, also known as an Accommodator or Facilitator, is a person or entity that facilitates 1031 exchange transactions on behalf of the taxpayer as defined under Treas. Reg. §1.1031(k)-1(g)(4).

It is important to know that you cannot act as your own QI, and neither can any of your "agents." Those include your real estate agent or broker, your accountant, attorney, employees, or anyone who has worked for you in any capacity within the last two years.

The essential role of the QI is to act as the exchanger's intermediary and prevent the exchanger from accessing funds transferred during the exchange process. The QI performs several other vital roles in facilitating the exchange process, including:

  • Working with the seller and their financial advisor on the 1031 exchange structure
  • Preparing all transaction documents related to the sale of the relinquished property and the purchase of replacement property.
  • Taking possession and holding the funds from the sale of the relinquished property
  • Depositing those funds for the replacement property sale and holding them in escrow during the 45-day identification period
  • Receiving and holding the written information about potential replacement properties
  • Transferring funds for the purchase when the replacement asset has been selected.
  • Providing a complete accounting of the 1031 exchange to the seller.
How to Select a QI?

For 1031 exchangers, it is critical to select a QI carefully because there have been instances where less experienced and "unqualified" QIs have failed to fulfill their responsibilities, and exchanges have been disqualified. In rarer instances, there have also been cases of fraud. That is why you need to understand the questions to ask of a QI when determining who you will use for your exchange. Here are several key areas to explore in your due diligence process.

First off, begin by asking a QI candidate if they are a member in good standing with the Federation of Exchange Accommodators. It is not a requirement that a QI is part of this association, but this non-profit organization is viewed as an industry benchmark and holds high standards that its members are expected to meet. Next, ask candidates these questions:

How many years have you been facilitating 1031 exchanges, and how many have you completed in each of the last five years? This question will help ascertain that the QI has been practicing for years and through many market cycles and has been active recently.

What is the largest exchange you have facilitated, and what is the average value of your exchanges over the last five years? This question will help you understand if the QI has handled large complex exchanges and if the QI has worked on exchanges like yours. 

Can you provide evidence of your E&O (errors and omission) insurance policy as well as your fidelity bonds? This question will help you identify if the QI has the proper insurance and bonding in place to protect you if something goes awry with your exchanges.

Have you ever had 1031 exchanges that were not completed, and if so, what was the cause? This is a fair question because the 1031 exchange process can be complex, and challenges can often arise. A QI which is forthright in discussing these situations is offering the transparency and honesty that may be important to you.

Where will the proceeds from the relinquished property be held? You should expect the funds will be held in an insured escrow account at a reputable bank. If a QI declares bankruptcy during the exchange process, you want to ensure your funds are protected.

Can you provide your written policies and procedures that highlight your internal controls? This is important to ask because it will help reveal the QI's attention to detail and provide you with a roadmap of the necessary steps they intend to guide you through.

What is your experience with Delaware Statutory Trusts (DST) as a like-kind investment option for 1031 exchangers? DSTs have become a more popular investment approach for 1031 exchangers, and the QI should have broad experience with these fractional interest investments.

At First Guardian Group, we have worked with 1031 exchange clients for over the past eighteen years. We have developed excellent relationships with what we believe are many of the most experienced Qualified Intermediaries. 

Please let us know if you would like us to introduce you to a few, and also, don't hesitate to call us at (866) 398-1031if we can assist with your exchange.


Help Save 1031 Exchanges.
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

 

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References:

1 https://www.irs.gov/businesses/international-businesses/miscellaneous-qualified-intermediary-information#:~:text=The%20use%20of%20a%20%22qualified,replacement%20property%20of%20like%20kind. 

2 https://www.1031.org/ 

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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