Questions to Ask Your 1031 Exchange Qualified Intermediary

By: Steve Haskell, Vice President, Kay Properties and Investments, LLC

When checking off the boxes for your 1031 exchange “to do” checklist, choosing a qualified intermediary should be on top of that list. The IRS requires exchangers to employ a qualified intermediary (aka “QI, “accommodator,” or “facilitator”) to receive the funds upon sale of the exchanger’s property. Section 1031 of the Department of the Treasury Regulations authorizes the QI to receive and hold the funds, advise on compliance matters, and prepare all agreements and documentation pertaining to the 1031 exchange transaction to ensure the exchange is executed properly under the Internal Revenue Code and Treasury regulations.

Exchangers are putting a tremendous amount of their wealth and trust in the hands of these qualified intermediary entities. Therefore, it is important to make an educated decision when selecting a qualified intermediary. Here are a few questions to ask QI candidates prior to selecting one for your exchange.

How experienced are you? Find out how many exchanges they have done, how long they have been in service, and how much in exchange funds they are currently holding. You should collect this information for both the company as well as the officer that has been assigned to your account. The 1031 Exchange is a nuanced process and attention to detail is extremely important. It is critical that you are equipped with sound guidance and the administration of your exchange is properly managed. Otherwise, it could result in a painful tax consequence and/or a failed exchange.

What type of internal control processes are in place to protect my exchange funds? The QI should be able to provide you with a written copy of their internal policy that outlines the safety measures in place to potentially protect your funds. One of the most important being that the QI CALLS YOU AND CALLS THE CLOSING AGENT PRIOR TO WIRING THE FUNDS. They should not simply disperse the information when contacted by the seller’s escrow/closing agent. 

Is your firm licensed? The IRS does not require QIs to be regulated. QIs can choose to obtain a license and fall under the regulation of various agencies in order to increase their credibility and ensure they are maintaining certain standards when handling client funds. Therefore, you should always find out if your QI is licensed and by whom they are regulated and audited.

Do you hold clients’ 1031 Exchange funds in either a separate Qualified Trust Account or a Qualified Escrow Account? It is important that the QI holds the funds in a Qualified Trust Account or a Qualified Escrow Account. Some firms will offer accounts that are “comingled” with other exchanger’s money. You should be able to receive a statement of your account at any time that shows how much and where your money is being held.

Do you carry errors and omissions (E&O) insurance? Some QI’s have a fidelity bond that only covers themselves. Others offer coverage to other parties in the exchange. The more coverage they have, the more your funds are potentially protected.

How do you ensure against embezzlement and employee theft? Though it is rare, it is important that your funds are insured from nefarious activity. You should find out if your QI’s fidelity bond coverage is “per occurrence” or merely “in aggregate”. Ask the QI for proof that their coverage is still active and in full effect.

What are the QIs hours? It is important to know if/how you can contact the QI after business hours, especially as you near the end of your 45 day window. You should also know the absolute last minute QI will receive your identification for the replacement property. Do they accept ID’s over the weekend? At night? What if your 45th day falls on a Sunday? 

How are my funds managed/invested while with the QI? Find out if your funds are held in a bank account or placed in various investment vehicles. If your funds are invested, make sure you understand the policy that guides how and where your funds are invested.

Mismanagement of funds, fraud, and bankruptcy is rare in the QI industry however it has happened before. Most companies do a satisfactory job. However, one mistake could lead to costly consequences. Therefore, it is critical that you take the time to do your due diligence when selecting the right QI for your exchange. 

About Kay Properties and 

Kay Properties is a national Delaware Statutory Trust (DST) investment firm. The platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market.  Kay Properties team members collectively have over 115 years of real estate experience, are licensed in all 50 states, and have participated in over 21 Billion of DST 1031 investments.

This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please read the entire Memorandum paying special attention to the risk section prior investing.  IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation.  There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed.

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