As most investors know, a big component of success in achieving your goals involves partnering with competent and trustworthy qualified individuals.
In a 1031 exchange, selecting a qualified intermediary (QI) to partner with is an extremely important matter. Not only will your QI provide vital consulting services throughout the course of the exchange, they will also hold the proceeds from the sale of your property. Choosing a capable QI can help your exchange go smoothly while choosing the wrong one could have negative consequences.
Not surprisingly, the best tactic for choosing a QI for your transaction is to ask questions. When you’re in the market for a QI for your 1031 exchange, you want to be sure that you ask all the right questions.
1031 Exchange Qualified Intermediary Questions: Security of Funds
One major area of concern is the security of your exchange funds. You should always ask questions that will give you a sense of how your prospective QI will hold and secure your funds. Here are a few questions you should be sure to ask before partnering with a QI:
Do you have errors and omissions insurance? This type of insurance provides protection in the event of negligence on the part of the QI. Ideally, your QI should have some level of errors and omissions coverage. If they do, also ask how much coverage is provided. You want to make sure that the coverage of the QI is adequate for your upcoming transaction.
Do you have a fidelity bond? This bond protects you against fraudulent, dishonest, or criminal behavior on the part of the QI. Fidelity bonds provide you with a much-needed layer of security because they ensure that no matter what happens during the exchange, you will not suffer financially if there is fraudulent behavior by either the QI or a partner working with the QI.
How are my exchange funds held and managed? This is a big question that has many components. You should be sure to ask a number of questions to get a full sense of how your money will be handled, including:
- Will your funds be kept separate from the operating funds of the QI?
- What steps are involved with releasing the funds from the QI account?
- How long does it take for your funds to be released?
You should be as thorough and detailed in your investigation as possible. Remember, these are your funds, and you want to guarantee that they are as safe as possible. You don’t want your funds to be commingled with QI operating funds as this could create a problem when it’s time to acquire your replacement property. And you also want to make sure that there won’t be any issues when it’s time to acquire your replacement property, so the procedure for releasing your funds should be as straightforward as possible.
1031 Exchange QI Questions: Reputation and Capability
In addition to the security of your funds, you also want to inquire about the credibility of your prospective QI. Along with asking for referrals from past clients, you should be sure to ask questions that will give you a sense of the QI’s capability and reputation. Be sure to at least ask the following:
Are you a member of the Federation of Exchange Accommodators (FEA)? The FEA is the national organization for entities that facilitate 1031 exchange transactions. Being a member of the FEA is one big indicator that your QI is reputable and well-qualified to perform the exchange.
What sort of documentation do you provide? As you might expect, like-kind exchanges involve quite a bit of paperwork and filling out all of this paperwork can be a complicated and time-consuming process. Be sure to ask your QI exactly what documents they provide and prepare. Do they handle all of the documents related to the closing of the relinquished property? What about the replacement property? Do they assist with Form 8824? Also be sure to ask how long this process will take.
Do you provide a letter of assurance or another guarantee? Be sure to ask what sort of guarantees your QI will provide for you. A letter of assurance is an excellent sign that your prospective QI is committed to excellence and will ensure that your needs are properly addressed. By itself, a letter of this kind has mostly symbolic value, but it also helps to prove that your QI is sufficiently organized and prepared to handle your exchange.
Ultimately, choosing a QI should be considered very carefully. Your QI ensures that your funds are safe and sound while all of the paperwork is being completed and all boxes are being checked.
Choosing the right real estate investment management firm to partner during your 1031 exchange is another crucial decision. At CWS Capital Partners, we have decades of experience with like-kind exchanges, working with QIs, and helping our clients navigate the 1031 exchange process.
Please contact us to learn more about investing with CWS Capital Partners, or view our current offerings by completing our self-certification form for accredited or qualified investors.
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.