Choosing a qualified intermediary can seem like full-time job. There are many things to consider such as:
- Is my qualified intermediary reputable?
- How do I know the qualified exchange company won’t lose my money?
- The qualified intermediary I’m talking to is halfway across the country. Can I do an exchange over phone and email?
- Will my qualified intermediary have experience with my situation?
When you’re speaking with qualified intermediaries, keep these questions in your back pocket. They’ll help you evaluate the qualified intermediary company.
Experience and Customer Service
What is the experience level of you and your firm? Are exchanges your exclusive line of work?
Many people do 1031’s on the side, or the company they work for is a bank or title company. We recommend going with an exchange company that exclusively does 1031 exchanges. Some of the largest qualified intermediary companies will cross-sell products from their parent company. We recommend staying aware of this during the process.
What hours are you reachable? If my exchange needs to be expedited, is this possible?
Some 1031 exchange companies are reachable 24/7/365, while others are only open for questions during business hours. If using a qualified intermediary who is not local, consider the time zone differences as well.
Since exchanges have strict timelines, you may come close to your 45-day identification or 180-day completion. Many exchange companies will expedite your exchange for a fee, typically $150-$300.
What kind of exchange services do you provide?
Some companies only do delayed (also known as forward) exchanges, and give a referral to another company for construction or reverse exchanges. Your situation may be complex and you’re not sure what type of exchange you want to do. In this case, we recommend a qualified intermediary company who can do all four types.
Are you a member of the Federation of Exchange Accommodators? Have your qualified intermediaries earned the Certified Exchange Specialist designation?
Qualified intermediaries for 1031 exchange are usually not required to be licensed, regulated, or audited by any regulatory agency. While FEA membership shows they’re involved with other exchange firms, it’s not always a necessity. We do put more weight in the CES designation. The CES requires an official exam that shows in-depth knowledge of the 1031 exchange process. We do recommend the experts you work with have this designation.
Fees and Security
What are your fees? Do you charge extra for different services?
Some exchange companies have a straightforward cost model, and some are complex. Ask your qualified intermediary to break out all possible fees before you sign anything. This will ensure there are no gotcha’s once the exchange is complete.
How do you handle client funds? Are funds kept in separate accounts or commingled? Is the bank you use FDIC insured?
You want to make sure that your funds are held separately from other clients. If your exchange company goes into bankruptcy, you want to be able to stake claim to your funds. Also, all accounts should be FDIC insured up to $250,000 and held at a reputable bank.
Do I get the interest income or do you?
Different exchange companies take wildly different approaches on this issue. Some states have regulated that you receive all interest income accrued, while others do not. For higher value properties, this can be a large amount of money you miss out on.
What internal policies and procedures are in place to safeguard client funds? What kind of cyber security prevention methods do you have in place?
Most exchange companies have set procedures before moving any client funds. These include strategies that ensure you are the person you say you are, and that you truly wish to move funds. Many exchange companies are small organizations. Ask them how they safeguard against the threat of hackers and phishers.
Are my funds held in qualified trust or escrow accounts?
Make sure that your funds are in one of these types of accounts. Otherwise, if your exchange company declares bankruptcy, your funds are used as “company money” to pay off creditors. If they are in trust or escrow accounts, you will have full claim in the event of an emergency.
What protections are provided? Is there a fidelity bond? What about a performance guarantee? Does the firm have errors and omissions coverage?
These are all necessary to ensure protection if your funds are lost or stolen while held. All reputable qualified intermediaries will have a fidelity bond and E&O coverage. Also, some provide a performance guarantee, but not all.
Eligibility to be Qualified Intermediary
Are you a lawyer who acts as a qualified intermediary for 1031 exchange?
Many qualified intermediaries are also lawyers, which can lead to confusion – is my qualified intermediary giving me legal advice? The answer is a resounding NO. The IRS clearly states that your qualified intermediary cannot give legal advice.
We have previous business dealings. Is it OK that you're my qualified intermediary?
This is also a big no-no. The IRS says your qualified intermediary cannot be a related party, which means they cannot be family or have any business relationship. This can be tricky if you get a referral from your real estate agent or title company. We recommend finding a third-party exchange company that you do not know, and knows no one you know. This ensures with nearly 100% certainty they are not a “related party.”
Do you abide by the qualified intermediary regulations in your state?
Certain states such as Washington and California have laws regulating the 1031 exchange industry. Ask your potential qualified intermediary if they abide by these. If they can abide by state regulations for their business, you have more confidence they’ll abide by IRS rules for your exchange!