The Qualified Intermediary: An Essential Role to Your 1031 Exchange
As we have discussed previously, several rules and regulations must be followed to complete a 1031 exchange successfully. One of the most critical requirements is to use a Qualified Intermediary (QI) when conducting an exchange. This article will introduce you to the QI, their roles and responsibilities, and the qualities you should look for when selecting yours.
What is a QI?
A QI is a person, company, or entity responsible for holding the proceeds from the sale of your relinquished property in a trust or escrow account to ensure you never take receipt of the sale proceeds throughout the exchange process.
Who Can Serve as a QI?
1031 exchange rules state that no "disqualified person" can serve as a QI. A disqualified person is defined as someone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent/broker within the two years of the date of the transfer of the property you are relinquishing.
Interestingly, there is no certification, licensing, or other eligibility requirements for becoming a QI. That's why its important to know what to look for when interviewing and comparing QI's for your exchange.
Typically, a QI will:
Coordinate with you on your 1031 exchange structure
Prepare and maintain all required documents
Provide escrow instructions for all involved transactions
Transfer the relinquished property to the buyer
Take control of sale proceeds and create a separate account to hold proceeds
Ensure the proceeds don't come under your constructive receipt
Hold the funds during the identification period
Receive the written information about replacement properties
Acquire replacement property or properties
Transfer the title for the replacement property or properties to you
What to Look for in a QI
There are several characteristics you will want to ensure your QI has, and a few of the most important include:
Policies and Internal Audit Controls
Confirm that the QI has detailed policies and internal audit controls, including multiple checks and balances.
Ensure your QI has at least a decade of experience with different types of 1031 exchanges. Ask for references and validate the QI's performance history.
Separate, Segregated Qualified Trust Accounts
Confirm the QI segregates he funds for each exchange into separate accounts held distinctly for each exchanger's benefit.
Confirm that the QI maintains fidelity bonding from a reputable provider to protect you from deliberate wrongful acts
Errors and Omissions Insurance
Confirm the QI maintains a current errors and omissions (E&O) insurance policy from a reputable provider.
Selecting Your QI
As a wealth management firm assisting clients with their 1031 exchange needs for over 25 years, we have extensive experience working with only the top QI's in the industry. We'd be honored to suggest a few of the most qualified and respected firms when you begin your selection process. Simply call us at (631) 421-4341.