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1031 Exchange Accomodators & Qualified Intermediaries (QI)

The Role of Qualified Intermediary (QI) In A 1031 "Like Kind" Exchange

Section 1031 of the Internal Revenue Code (IRC) offers a great opportunity for real estate buyers to defer the capital gains tax liability associated with the sale of a business or investment asset. The 1031 exchange ensures the maximum return on investments to people of all financial backgrounds. To qualify for 1031 "like kind" property exchange the entire transaction has to be done in accordance to the detailed rules, regulations and compliance issues set forth in the US (IRS) tax code.

The (QI), also known as a facilitator or exchange accommodator the Qualified Intermediary (QI) serves a crucial function under the Internal Revenue (IRS) Code. Choosing an Intermediary to facilitate the 1031 exchange is usually the first and one of the most important steps. The Qualified Intermediary (QI) should be a company that works on a full-time business of facilitating 1031 exchanges. The Internal Revenue (IRS) Code requires that the person or entity serving as (QI) cannot be someone with whom the exchanger has had a former business or family relationship prior to the transaction. The IRS code is clear in the fact that a (QI) has to be an independent organization whose only contact with the exchanger is to serve him as a Qualified Intermediary (QI).

A Qualified Intermediary (QI) must be used to facilitate the 1031 Exchange Transaction and as a matter of fact, by definition, a 1031 Qualified Intermediary (QI) is an independent and professional facilitator who receives the funds. He handles the funds from the original sale and holds the funds until they are needed to purchase the new exchange (replacement) property. The Qualified Intermediary (QI) then directly delivers the money to the closing agent who then, in turn, delivers the deed directly to the real estate investor himself.

A Qualified Intermediary is responsible for performing the following activities in a 1031 Exchange:

  • Acquiring the Relinquished Real Estate Property from the taxpayer himself.
  • Transferring the Relinquished Real Estate Property to the buyer himself.
  • Acquiring the Replacement Real Estate Property from the seller himself.
  • Transferring the Replacement Real Estate Property to the taxpayer himself.

The Qualified Intermediary can actually perform all these without ever taking title to either of the properties. The Qualified Intermediary is responsible for properly filling out the appropriate tax forms for the client. In a typical exchange the Qualified Intermediary (QI) typically provides 3 different documents, Number 1: The exchange agreement. Number 2: An assignment. Number 3: A notice. The 1031 exchange agreement is a contract between the client and the Qualified Intermediary that sets out the rules and guidelines. This must be followed in order to complete the 1031 exchange. The assignment of the "sales contract" to the Qualified Intermediary must also be in place. This is in place because, in theory, the Qualified Intermediary steps into the client's position and sells the property. The third document the Qualified Intermediary provides is a notice to the party on the other side of the transaction advising that the transaction is indeed a 1031 exchange. The purpose of notification to the other party is to prove, without doubt, that the 1031 exchange was in place at the closing.

An exchanger must be particularly aware of selecting a knowledgeable (QI) before going into the transaction. There are thousands of (QI) providing "like-kind" 1031 exchange services today. Most of the Qualified Intermediary don't have the necessary insurance, financial backing, bonding, transactional structure, and internal safety controls that should be required of them. Even most exchange funds are often grossly under-insured, under-protected, and are at risk. In today's risky economic climate, choosing a financially secure, 1031 (QI) with the financial strength, resources, safeguards, and financial backing is critical for the safe completion of a 1031 "like-kind" exchange transaction with a Qualified Intermediary.

Is it necessary to select a QI that has Fidelity Bond Insurance?

Yes, always make sure your QI is bonded and insured.


4 Things to Concern Yourself with Before Selecting a Good QI

1. The first thing to make sure is that your QI is Bonded and Insured. 1031 Exchange Made Simple does not conduct a background check on all the QI's is our network, so recommend you double check their insurance and bonding. Check to make sure all their Bonding payments are in place and up to date. Also make sure that you feel comfortable with their insurance company and that they are also reputable.

2. Work with a national, reputable QI. Usually the national QI's have the financial stability to stay in business during the lean years when Real Estate is slow. The last thing you need is a small, local, QI shop go out of business while they are the ones holding your funds on a 1031 Exchange. Even though the local QI might also be Bonded and insured, it's the time frame that can be effected, before an insurance company releases your funds (in a default situation).

3. The QI needs to be separate from the transaction, so in our opinion, you may or may not want to work with a QI referred to you by your Real Estate attorney or CPA. This relationship can create conflicts when doing a 1031 exchange, plus this may or may not actually disallow the exchange altogether. By law, the QI needs to be an "unbiased" third party to the exchange, so usually the QI keeps an eye on the attorney and the attorney keeps an eye on the QI. Even though most title companies don't do 1031 exchanges; using your title company or the title company of your attorney, can also (in some cases) violate this rule.

4. What type of exchanges does your QI handle? Are they experts in reverse 1031 exchanges or Land Improvement exchanges or combinations of both. Is your QI familiar with all the 1031 exchange investment opinions? Is your QI a CPA or Attorney? Will they help you obtain financing? These are the things to consider when finding the right QI. How long have they been doing exchanges and do they know what they are doing, because one mistake can get you a call from the IRS.

5. Price is the last thing that you should concern yourself with when selecting a QI for a 1031 exchange. Most QI's charge anywhere from $750 - $2000 to do an exchange. Its a very low margin business and that is why 1031 Exchange Made Simple rather refer the business out.


Disclaimer: 1031 exchange made simple does not guarantee the performance of the QI's in our referral network and we can not be held liable for any misrepresentations or mistakes in regards to a 1031 exchange by one of the QI's that we refer to you. 1031 Exchange made simple does not provide tax advice nor can we make representations regarding the tax consequences of an exchange transaction. 1031 Exchange made simple is a 1031 QI Referral Network. 1031 made simple is not responsible (in any way) for the performance, creditability, and financial condition of any QI in our network. In this new economic environment it is imperative that all potential 1031 exchange customers do their own due diligence and research on any QI that they may use, on a 1031 exchange. Please verify and check the validity of the Bonding and Insurance of your QI. It may be wise to have your 1031 exchange accounts set up as separate, individual customer accounts. Our web site is to be used as a information based web site only. All parties doing a 1031 exchange must consult their tax advisors or attorney for this information.

If you are in need of a qualified intermediary and would like to be matched up with one of our fully licensed and bonded QI's in your state, please call 1-877-812-1031

If you are a fully licensed Qualified Intermediary and would like to be evaluated and possibly added to our network of QI state and local providers, please call us today at: 1-877-812-1031


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