Finding a Qualified Intermediary for Your 1031 Exchange

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:

  1. 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.
  1. 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.
  1. 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?
  1. 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.
  1. 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

When evaluating Qualified Intermediaries (QIs) for 1031 Exchanges, it is essential to consider their insurance coverage and fee structure:

Insurance Coverage:

Man protecting a small house shaped object symbolizing the strategy to accumulate wealth through a 1031 exchange with proper insurance coverage
  1. Fidelity Bonds: Inquire about the QI's fidelity bonds, which provide coverage against potential fraud or misappropriation of funds by the intermediary.
  2. 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.
  3. 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.

Fee Structure:

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

Mature couple sitting with financial advisor discussing strategies to accumulate wealth through 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:

  1. 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.
  2. Cybersecurity: Evaluate the QI's cybersecurity protocols to ensure they have safeguards in place to prevent unauthorized access, data breaches, or cyber threats.
  3. 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.

Client-Centric Counsel:

  1. 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.
  2. 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.
  3. 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.

In Conclusion: 

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.

General Disclosure

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: 

DST Cash Investments as a Substitute for Stock Market Investing

For accredited investors participating in a 1031 exchange, Delaware Statutory Trusts are a worthwhile investment option to consider. However, some investors are unaware that DST cash investments are also a viable option.

Why think about making a DST investment?

DSTs may provide a number of advantages to investors engaging in a 1031 exchange, including the possibility to postpone the realization of capital gains from the sale of investment real estate and the avoidance of some of the risks involved in finding a replacement property quickly.

However, there are additional potential DST advantages that can benefit investors as a complement to either outright real estate ownership or stock market trading.

Potential Advantage #1: Professionally managed passive income

Have your money working for you - DSTs are professionally managed by asset managers and property managers who are responsible for ensuring that the tenants pay their rent on time and delivering the investor a check, often every month (assuming funds are available). You never engage with any of the tenants and have no management duties as an investor.

Potential benefit #2: Geographic and real estate sector diversification

It's wonderful to make an investment and see it pay off. What if it doesn't, though? Any investment has the potential to experience losses, whether it be in real estate, equities, futures, commodities, jack's magic beans, etc. However, the risk is spread out when one diversifies their portfolio by making investments in several different things.

Investors have access to a variety of DST real estate investments from different DST sponsors, including multifamily, storage space, commercial, and NNN leases. Additionally, you can invest in a specific type of DST, like multifamily, across a number of different geographic areas of the nation, increasing the likelihood that other locations won't experience a downturn in their local economies or, at the very least, lowering the likelihood that they will due to diversification.

Benefit #3: Supported by tangible assets

The fact that real estate is permanently anchored to the earth makes it one of the reasons why so many investors adore it. Real estate also has an inherent value, which means that it is fundamentally a hard asset with at least some minimal value, as opposed to a firm, whose shares can possibly lose all of its value should the latter go bankrupt. Uncovered natural disasters and foreclosure are always a possibility, but as was already mentioned, no investment is without risk.


Potential benefit #4: traditionally less volatile and associated with the stock market

The stock market can be unpredictable, as we've recently witnessed during the coronavirus pandemic. On other days, market volatility in the double digits have been the norm. The link between real estate and the stock market, however, has historically been smaller. Real estate is typically much less affected by market turbulence than the equity markets, but that doesn't mean it can't be volatile and experience a downturn like we did during the Great Recession of 2008–2009.

Potential benefit number five: access to institutional real estate.

Real estate is a popular way to possibly accumulate money and has several advantages as an asset type. Real estate, however, is not created equal. Real estate is similar to how there are blue-chip stocks and "junk" bonds. There are DSTs that allow investors to purchase "institutional-level" real estate, which is generally real estate that is thought to be of a certain grade and class such that huge institutions and significant investment funds would consider it. The majority of people would find it challenging to access these kinds of real estate investments on their own, but the DST structure enables them to indirectly hold a portion of these investments that they would not otherwise be able to.

Potential Perk #6: Low Minimum Investment for Accredited Investors (sometimes as Low as $25,000)

Sometimes as little as $25,000 can be invested directly in a DST as the minimal amount. This gives them access to DST real estate assets that would normally cost millions of dollars to acquire, finance, and operate on a fractional basis and is not a princely sum for the majority of accredited investors.

Potential benefit #7: DSTs allow investors to perform a 1031 exchange when the investment property is sold, according to current IRS regulations.

Investors who buy in equities, for instance, must pay capital gains taxes on any profits they make (note: Opportunity Zones may provide an option to defer those gains). However, under the current IRS code, investors have the choice to do a 1031 exchange into another property into which they own 100% or another partial DST, so delaying any capital gains, once a DST asset has been sold. Of fact, if President Biden's economic plan is approved, changes to the IRS rules, such as those under it, could alter how future earnings are treated.

Potential Advantage #8: Cash investors do not need personal finance clearance.

In contrast to buying a property directly and potentially needing to obtain financing from a lender, DSTs provide investors with non-recourse loans that are not dependent on the investor's capacity to obtain financing.

How Should I Invest My Wealth in 2022?

The present market offers financial backers a plenty of speculation valuable open doors across various ventures. While having different choices can assist with further developing a singular's venture methodology, they can likewise cause vulnerability, bringing up issues about which speculation suits the individual's monetary targets. So you may be wondering where do I invest my wealth in the current economy.

To help give guidance on which investment is ideal for you, we will frame the fundamental components of the present most wanted speculations and go over the upsides and downsides of every one.

For this article, we will isolate the data into two segments. To start with, we will take a gander at more conventional speculation choices, like putting resources into stocks or bonds. Then, we will audit elective speculations. Albeit less known among the present financial backers, elective choices offer potential advantages that numerous customary speculations need.

Customary Investment Options

By and large, financial backers have depended upon a 60/40 portfolio piece to assist them with accomplishing their long-term monetary dreams, for example, fabricating a savings for retirement, reimbursing a home loan early, or paying instructive costs for their youngsters. As indicated by this model, a financial backer's portfolio ought to comprise of about 60% stocks and 40 percent bonds. This model generally would in general convey financial backers stable development and pay to assist them with meeting their monetary objectives.

Stocks, or values, are protections that address partial possession in an enterprise. Financial backers purchase stocks and depend upon the organization's development to expand their abundance after some time. Also, stocks may offer financial backers profits - or installments to investors - for recurring, automated revenue. Then again, bonds are obligation protections presented by a company or government substance hoping to raise capital. Not at all like stocks, bonds don't give financial backers proprietorship freedoms, yet rather they address a credit.

The largest contrast among stocks and securities is the manner by which they produce benefit: stocks should appreciate in esteem and be sold later on the financial exchange, while most bonds pay fixed interest after some time.

While stocks offer financial backers the potential for more significant yields than securities, securities are by and large considered a safer venture. Therefore, numerous financial backers go to venture reserves, like common assets, trade exchanged reserves, or shut end assets, to broaden their portfolios while keeping a 60/40 arrangement. These venture subsidizes arrange capital from various financial backers, which is then, at that point, put into an arrangement of stocks and bonds. Venture subsidizes offer financial backers the possibility to moderate risk through a more adjusted portfolio.

A Change in the Portfolio Model

Because of progressing unpredictability in the stock and security market, rising costs for wares, and high valuations, the customary 60/40 portfolio model is done serving financial backers in a similar way it once did. Therefore, numerous monetary specialists are presently suggesting that financial backers broaden their portfolios with 40% elective ventures to help possibly advance their monetary position.


Elective Investments

While various kinds of elective ventures exist, we will zero in on elective land speculations because of the advantages they might perhaps offer financial backers in the present market.

Why Invest in land?

Land has for quite some time been one of the most sought-after open doors for financial backers. As a restricted ware, land has generally managed the cost of financial backers the potential for long haul security, fantastic returns, recurring, automated revenue, charge benefits, and a fence against expansion. Notwithstanding, land speculations additionally accompany specific drawbacks. Beginning in land effective money management ordinarily requires a broad measure of capital and solid financials for the individuals who are utilizing obligation.

Besides, land by and large requires dynamic support - financial backers are expected to deal with their resources for guarantee ideal execution. In this manner, elective interests in land have begun filling in prominence among the venture local area. While they can frequently offer comparable benefits to land money management, they convey a uninvolved open door, meaning they have zero administration obligation. The following are a couple choices for financial backers looking for elective land speculations.

Real Estate Investment Trusts

A real estate investment trust (REIT) is an organization that possesses and normally works pay creating land or related resources. REITs consolidate all resource types, including multi-family, retail, senior living, self-capacity, cordiality, understudy lodging, office, and modern properties, to give some examples. Dissimilar to other land ventures, REITs by and large buy or foster land for a drawn out hold.

Financial backers depend on a REIT's comprehension expert might interpret the housing business sector to broaden and balance out their portfolios. Numerous REITs are public, implying that all financial backers, including unaccredited financial backers with restricted capital, can put resources into them.

While public REITs convey many benefits related with customary land effective financial planning - like pay potential, broadening, and conceivable expansion security - they additionally accompany some particular inconveniences. For instance, REITs frequently experience slow development. Since REITs should pay out at least 90% of their benefits in profits, new acquisitions and improvements are restricted. To decide the strength of a venture, potential financial backers ought to lead a reasonable level of investment - with the help of a specialist on the REIT before buying shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a lawfully perceived land speculation trust where financial backers buy a possession interest, or partial proprietorship, in a land resource or land portfolio.

DSTs are usually depended upon by 1031 trade purchasers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

As well as giving financial backers recurring, automated revenue potential through an administration free venture, DSTs empower financial backers to put resources into institutional quality resources for which they wouldn't in any case have access. These resources might have the option to convey more significant yields and longer-term strength.

Moreover, the obligation designs of DSTs are appealing to numerous financial backers. Individuals who put resources into DSTs have restricted obligation equivalent to their ventures; nonetheless, they can exploit the frequently alluring funding gotten by the support organizations. Sadly, just licensed financial backers can put resources into DSTs.

Opportunity Zones

Opportunity zones (OZs), characterized by the IRS, are "a financial advancement device that permits individuals to put resources into upset regions in the United States. This incentive’s intention is to prod financial development and work creation in low-pay networks while giving tax breaks to financial backers." OZs were presented. under the Tax Cuts and Jobs Act of 2017, and financial backers keen on putting resources into an OZ should do as such through a qualified opportunity fund (QOF).

QOFs can be an eminent choice for financial backers because of their tax breaks, which rely upon the period of time a financial backer holds a QOF venture. We have recently made sense of these advantages, which we allude to as OZ triple-layer charge motivators. Here is a depiction of the tax cuts a QOF offers a financial backer:

● Deferral: Those who rollover their capital increases into a QOF can concede capital earn respect from the first speculation until December 31, 2026.

● Decrease: how much capital increase perceived from the first speculation is diminished by 10

percent in the wake of accomplishing a five-year holding period, as long as that five-year holding period is accomplished by December 31, 2026.

● Avoidance: Long-term financial backers are qualified to pay no expense on the enthusiasm for their QOF venture upon attitude of that speculation, no matter what the benefit size, assuming the resources held in that QOF are held for no less than 10 years.

While opportunity zones are viewed as an unsafe speculation, provided their motivation, they might possibly convey financial backers better yields when contrasted with other elective land venture choices.


Interval Funds

An extra elective venture choice worth focusing on are interval funds. These assets are not restricted to land yet rather can be utilized to put resources into numerous protections, including land. Comparable to recently referenced reserves, these arrange investor money to put resources into various protections. Be that as it may, they offer a lower level of liquidity. Rather than having the option to exchange shares everyday, financial backers are normally restricted to selling their portions at expressed spans (i.e., quarterly, semi-every year, or yearly). The advantage of stretch assets is the adaptability they offer the assets - they permit the asset to execute longer-term procedures, making the potential for a more steady venture.

Accordingly, interval funds will generally convey better yields and a more broadened an open door. Presently, where do I put away my cash today? While the above data offers a depiction into the upsides and downsides of different speculation choices, you ought to think about extra perspectives. As opposed to promptly attempting to distinguish which choice is ideal for your purposes, the critical focal point here is to comprehend that the present market offers a variety of venture choices that were already obscure to quite a large number. Financial backers can broaden past stocks and bonds, which might potentially give them more significant yields while trying to relieve risk. To foster a venture portfolio that meets your monetary objectives, we encourage you to talk with one of our monetary experts.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. 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. 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: