The following blog post was written by our friend and colleague, Sean Ross at 1031x. Like many Qualified Intermediaries we work with, Sean has helped facilitate many successful 1031 exchanges for his clients. Below is a brief overview of the role of a QI in your exchange.

Hundreds of thousands of investors use a 1031 exchange strategy each year to defer taxes on the sale of real estate and trade into more advantageous property.  

1031 exchanges offer great flexibility and tax efficiency, and speaking generally this is a tool that every long-term investor should have at their disposal. 

However, thanks to IRS restrictions, you can’t prosecute a 1031 exchange on your own — you (almost) always must work in tandem with a Qualified Intermediary. 

What Is a Qualified Intermediary?

Speaking technically, a Qualified Intermediary (or “QI”) facilitates tax-deferred exchanges for a taxpayer by following specific rules set forth in Treasury Regulation §1.1031(k)-1(g)(4). 

The regulations spell out four major formal roles for the QI:

1. The QI stands in as the seller (when you sell)
2. The QI secures and holds the proceeds from sale
3. The QI stands in as the buyer (when you buy)
4. The QI transfers replacement property back to you (to conclude)

Effectively, the Qualified Intermediary exists to  create legal distance between you (the taxpayer) and the consequences of your sale and purchase. 

This is how you get to defer your taxes. 

However, we are really just scratching the surface here. Because in a modern marketplace, any intermediary you work with should do much, much more than what is technically required. 

The Qualified Intermediary as Your Guide

Imagine visiting a foreign country.  Imagine the national language is not English, so you hire a guide. 

A good guide will translate for you, but they’ll also help you navigate new customs, keep you from getting ripped off and out of bad areas, and help you maximize your experience. 

This is what your Qualified Intermediary should do for you. 

1031 exchanges have their own language. They have their own pace, arcane (and often unrelated) rules. There are plenty of landmines. Yet a 1031 exchange can also open up unexpected opportunities.  Most of our clients enter the 1031 world completely unaware of just how many options exist for investors. 

From a “best practice” lens, here is the role that your QI should play in a 1031:

• Carefully consider your legal, tax, and financial circumstances
• When necessary, craft a bespoke 1031 strategy for you
• Coordinate with your agent, lender, title company, attorney, and/or CPA (more often that not, the QI acts as the coach here)
• Review all closing documents to ensure compliance
• Help you stay within your 45-day and 180-day deadlines
• Maintain and provide easy access to all material records
• Hold your sale proceeds in an individualized, non-commingled and insured escrow account with a reputable and stable bank
• Require dual authorization and valid signatures before moving any funds

Who Can Be Your Qualified Intermediary?

Exchange companies exist in a relatively unregulated space, especially compared to most of the financial services industry. Outside of companies that operate in Nevada, there are no licensing requirements to become a QI.  In fact, fewer than 10 states have specific legislation concerning and exchange facilitators. 

There are a few federal restrictions. Most of these are set forth in IRS Fact Sheet 2008-18. 

The following CANNOT be your 1031 intermediary:

• You (or any entity of which you are a party)
• Your agent
• Your attorney
• Your accountant
• Your investment banker
• Your real estate agent
• Your employee
• ...anyone who fit in these categories in the two previous years

Besides these related persons, virtually anyone can set up shop and call themselves an intermediary. In fact, QIs enter and exit the market with great frequency. 

And herein lies a huge risk. 

Remember, the QI has to hold your sale proceeds.  This can mean hundreds of thousands or millions of dollars per investor. The potential for fraud and theft are enormous. Even if a QI doesn’t have bad intentions, they are still a major target for wire fraud and other abuse. Investors really need to do their diligence. 

There are plenty of long-standing QIs that operate in all 50 states, take great care to safeguard their client funds, and perform their role with professionalism. Many of these are connected through their membership with the Federation of Exchange Accommodators, which is the nation’s sole trade organization set up exclusively to represent and create standards for 1031 intermediaries. 

You can learn more about Sean and 1031x here.

Please contact us at Fortitude if you need more information about finding the right QI for your situation. 

Have you read our latest Ebook, The ABCs of DSTs? 

This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. There are material risks associated with investing in real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance services offered though Concorde Insurance Agency, Inc. (CIS). Fortitude Investment Group is independent of CIS, CAM and CIA, all of whom are independent of 1031x, and cannot verify the accuracy of, nor assume responsibility for any content of linked third-party sites. Information available on third-party sites is for informational purposes only.