Not all business transactions go smoothly, and choosing the wrong partner to work with is a surefire way to produce an experience full of hiccups and headaches. Think of any time you hire a professional to do a job for you—an accountant to do your taxes, a lawyer to update your will, or even a plumber to handle a repair in your bathroom. If that individual isn’t responsive, doesn’t communicate well, or doesn’t exhibit the kind of professionalism you expect, it can make you feel uneasy. With any business transaction, exercising care and caution to choose the right partner is important to achieve the outcome you want.
This same idea holds true when it comes to selecting a qualified intermediary (QI) for your 1031 exchange. Whenever you engage in a tax-deferred 1031 exchange, a QI must be procured to guide and properly structure the transaction. Tax-deferred 1031 exchanges follow a number of required steps, and your QI ensures they are all completed on time and satisfactorily. Essentially, your QI is your partner in dealing with the other party in the exchange and your assistant in each stage of the process.
Selecting a QI you can trust and rely on for your exchange is a task that requires a good bit of effort. If you are diligent in choosing the right QI, you will have taken a huge step toward maximizing your entire 1031 exchange experience. Failing to choose the correct QI can lead to all sorts of undesirable outcomes, including delays, errors, and anxiety. It can even cause the entire deal to fall through.
Let’s go over some of the essential attributes to look for when selecting a QI for your section 1031 transaction.
Certain People Are Disqualified From Serving as Your Qualified Intermediary
Before we discuss the particular attributes you should seek out in a prospective QI, it is worth noting that not all people are eligible to serve as your QI. Subsection (k) specifies which parties are “disqualified” from serving as your QI. Individuals disqualified by the subsection include:
- Your employees
- Your attorney
- Your accountant
- Your investment banker
- Your investment broker
- Your real estate agent
- Your real estate broker
The people identified above will be disqualified if they have provided services to you within the last two-year period prior to the 1031 exchange. As a general matter, subsection (k) intends to forbid you and other investors from using a pre-existing “agent” as your QI, and the above-specified people all fall into that category.
Importantly, if you use a financial institution, insurance company, or escrow agency to perform routine services, you may use them as your QI. In other words, if one of these types of entities performs only basic services for you and clearly doesn’t represent you in a professional capacity, that entity may serve as your QI. This makes sense because the subsection is meant to limit QIs to “non-agents” with whom you have only infrequent interaction.
What to Consider When Selecting a Qualified Intermediary
To get started with your search for a competent QI, there are several avenues you can take. You can independently conduct research via the internet and call prospective QIs who work in your particular area.
The other option is to consult with the real estate investment management firm you’ve selected to partner with for your exchange. Capable and client-focused firms will be able to recommend QIs and will typically have a trusted QI with whom they regularly work with.
Once you’ve placed a few QI candidates on your radar, there are a few items to look out for that can help you narrow down your candidates and make the right choice:
Bond coverage. One of the first (and most important) things to consider is whether the prospective QI is adequately bonded. You want to ensure that your QI possesses fidelity bond coverage, which is protection against claims of fraudulent or dishonest behavior. Be sure that your QI is bonded for a sufficient amount to protect your funds. It’s also a good idea to inquire as to whether your QI has errors and omissions insurance. This insurance protects you in the event that significant mistakes are made during your exchange.
A written guarantee of funds. You also want to ask what sort of guarantee your QI offers. Some QIs make their customers sign a “hold harmless agreement.” This agreement basically relieves the QI of responsibility in the event that a mistake is made by the QI and the exchange fails to qualify for non-recognition of capital gains under section 1031. You should avoid contracting with QIs that have such a policy and opt for an entity that can provide a firm guarantee that the transaction will achieve its desired aim.
Different QIs will likely have different titles given to their guarantees. The most important thing is to make certain that your QI gives you a guarantee that holds firm regardless of whatever unforeseen circumstances may come up in the future. Be sure that your guarantee is in writing and is signed by both you and your QI.
Experts and experienced staff. You also want to select a QI that has qualified staff members, and you want to be certain that these staff members are responsive to your particular needs. It is best for a QI to have experienced attorneys in managerial positions to oversee that everything goes according to plan.
Carefully inspect the credentials of the managers of your prospective QI and make sure that they are adequate. You also want your QI to have staff members with significant real property exchange experience. Having members with this type of experience will ensure that your QI is in the best position to complete your exchange smoothly and efficiently. More experienced staff members will be able to meet deadlines better and be more equipped to guide you through the process.
To gauge the reputation of your QI candidate, ask other investors and get a sense of how satisfied others have been with their services. But perhaps above all, trust your instincts: If you do not feel as though the staff members of a QI will be sufficiently attentive to your needs, it is probably the correct decision to move on to another candidate.
Your Real Estate Investment Partner Can Help Select an Intermediary
Choosing the right QI for your deferred exchange is an important step in the process. You want to be as certain as possible that your QI will provide consistent, high-quality service to alleviate any anxiety you may have at any stage of the process. Section 1031 is a complicated piece of code, after all. And, though they are advantageous to you and other investors, 1031 exchanges can often be overwhelming because of their complexity.
At CWS Capital Partners, we know how crucial it is to select a trustworthy and respected QI for your 1031 exchange. That’s why we work with some of the top QIs in the industry to ensure our clients’ 1031 exchanges go as smoothly as possible. Reach out to CWS Capital Partners today to get started with your 1031 exchange.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.