Finding a Qualified Intermediary for Your 1031 Exchange
By Paul Chastain on June 26, 2023
When engaging in real estate investing, it is crucial to assemble a team of trusted professionals to navigate and execute your investment approach successfully. Among these professionals, finding a reliable Qualified Intermediary (QI) is paramount, especially when undertaking tax-deferred 1031 Exchanges. The QI plays a crucial role as the "Exchange escrow," holding the sales proceeds from the relinquished property until the identification of replacement properties and the subsequent purchase.
To ensure a smooth and orderly 1031 Exchange, evaluating potential Qualified Intermediaries requires a framework for assessment. Here are some criteria we use to evaluate QIs:
Experience and Expertise: Look for QIs with extensive experience and a solid understanding of 1031 Exchanges. Consider their track record, industry reputation, and the number of successful exchanges they have facilitated.
Compliance and Security: Verify that the QI adheres to all legal and regulatory requirements. Confirm their compliance with IRS guidelines and industry best practices. It is also essential to assess their financial stability and the measures they have in place to safeguard clients' funds.
Service and Support: Evaluate the level of customer service and support provided by the QI. Are they responsive, knowledgeable, and proactive in assisting clients throughout the exchange process? Do they offer comprehensive guidance and resources?
Reputation and References: Research the QI's reputation within the industry. Seek feedback from other real estate investors who have previously engaged their services. Online reviews and testimonials can provide valuable insights.
Fee Structure: Compare the fee structures of different QIs and assess the value they provide in relation to the services offered. Consider both the upfront fees and any additional costs associated with the exchange process.
By carefully evaluating these criteria, you can make an informed decision when selecting a Qualified Intermediary for your 1031 Exchange. Collaborating with a reliable and competent QI will contribute to a seamless and successful exchange process, enhancing your overall investment experience.
Insurance and Fee Structure Considerations for Qualified Intermediaries in 1031 Exchanges
Fidelity Bonds: Inquire about the QI's fidelity bonds, which provide coverage against potential fraud or misappropriation of funds by the intermediary.
Errors and Omissions (E&O) Insurance: E&O insurance protects against errors, omissions, or negligence in the performance of the QI's duties. Confirm that the QI carries appropriate E&O insurance.
Written Performance Guarantees: Some QIs may offer written performance guarantees, assuring clients of the QI's commitment to fulfilling their obligations. Evaluate the scope and terms of such guarantees.
It is reasonable to request proof of insurance coverage from the QI. They should be willing to provide documentation or information regarding their insurance policies and the specific situations they cover. This will give you confidence in their ability to handle potential risks and protect your interests.
Typically, straightforward 1031 Exchanges involve the exchange of one property for one or more properties, with defined and relatively low costs. Ensure that the QI clearly outlines their fee structure and provides an estimate of the associated costs for your particular Exchange.
For more complex exchanges, such as Improvement Exchanges or Reverse Exchanges, there may be variability in the fee structure due to the additional complexities involved. However, even in these cases, the fees should be defined and communicated in advance. It is essential to have a clear understanding of the fee structure and associated costs to make informed decisions regarding your Exchange.
By evaluating the QI's insurance coverage and fee structure, you can ensure that they have adequate protection against potential risks and that their fees are transparent and reasonable. These considerations contribute to selecting a reliable and trustworthy QI for your 1031 Exchange.
Internal Security Controls and Client-Centric Counsel Considerations for Qualified Intermediaries in 1031 Exchanges
When evaluating Qualified Intermediaries (QIs) for 1031 Exchanges, it is important to consider their internal security controls and their ability to provide client-centric counsel:
Internal Security Controls:
Data Security: Inquire about the potential QI's policies and measures for data security. Assess their ability to protect sensitive client information, including financial and personal data.
Cybersecurity: Evaluate the QI's cybersecurity protocols to ensure they have safeguards in place to prevent unauthorized access, data breaches, or cyber threats.
Identity Verification: Understand the QI's procedures for verifying the identities of clients and counterparties involved in the exchange. This helps mitigate the risk of fraudulent activity and identity theft.
The industry trade association for QIs, the Federation of Exchange Accommodators (FEA), has established best practices that QIs should adhere to in order to protect client funds. Assess whether the potential QI aligns with these best practices and demonstrates a commitment to maintaining internal security controls.
Legal Guidance: Quality QIs provide valuable counsel to clients regarding the legal aspects of the Exchange. While they may recommend clients consult with their own attorney for liability purposes, a reputable QI should have experienced attorneys available to address any questions or concerns the client may have during the Exchange process.
Responsiveness: Evaluate the QI's willingness to provide timely and helpful guidance to clients. They should be proactive in addressing client inquiries and ensuring a clear understanding of the legal aspects of the Exchange.
Finding a QI that prioritizes client-centric counsel demonstrates their commitment to serving their clients' best interests and ensuring a smooth and legally compliant Exchange process.
By considering a potential QI's internal security controls and client-centric counsel practices, you can select a trusted partner who prioritizes data security, provides reliable legal guidance, and fosters open communication with their clients throughout the 1031 Exchange.
Tax-deferred 1031 exchanges offer significant opportunities for wealth preservation and asset repositioning. However, the key to success lies in assembling the right team of professionals. If you are interested in exploring the potential benefits of tax-deferred exchanges or would like to discuss our preferred qualified intermediaries, we are here to assist you. Feel free to reach out to us, and we'll be happy to provide further information and guidance.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.
Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.
1031 Risk Disclosure:
There’s no guarantee any strategy will be successful or achieve investment objectives;
All real estate investments have the potential to lose value during the life of the investments;
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
All financed real estate investments have potential for foreclosure;
These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
Securities offered through Emerson Equity LLC, member FINRA / SIPC. This is not an offer to buy or sell securities. Securities investing carries an inherent risk of loss of some or all of the principal invested. We are not tax professionals. You should always discuss your investments with a tax professional prior to investing. Securities are sold only in those states where Emerson Equity LLC is registered. Perch Wealth LLC and Emerson Equity LLC are not affiliated. COMPANY and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA / SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein.
Check the background of this firm/advisor on FINRA’s BrokerCheck.
Perch Financial LLC and Emerson Equity LLC do not provide legal or tax advice. Securities offered through Emerson Equity LLC Member FINRA/SIPC and MSRB registered. Emerson Equity LLC is unaffiliated with any entity herein. 1031 Risk Disclosure:
There is no guarantee that any strategy will be successful or achieve investment objectives;
Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood, and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with your tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward-looking statements are never an assurance of future results.
Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read, and understand all the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.
Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss.
NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by Perch Financial LLC, Emerson Equity LLC, or any affiliate, or partner thereof. Perch Financial LLC does not warrant the accuracy or completeness of the information contained herein.