Today, some investors are finding themselves with plenty of equity in their property and want to trade up or buy additional properties. Fortunately, the IRS allows investors to sell their properties with unlimited gains and defer their tax liability by identifying another like-kind investment within 45 days (known as a 1031 Exchange).
But the IRS requires the use of a Qualified Intermediary (QI) or Accommodator to oversee the process, and more importantly, the funds involved. The QI holds the funds from the sold property in an escrow account and then uses those funds to purchase the replacement property on behalf of the investor.
There's a lot at stake in this transaction, including your hard-earned money plus the complicated regulations involved with deferring your tax gains, so it's important you choose the right QI. You'll want to raise the following concerns with anyone you interview regarding their role as your future 1031 exchange specialist.
Regulations vary by state, and not all require bonded or insured QIs. And if you choose a QI that isn't bonded or insured, you put your funds at risk of loss or theft, plus you put your tax deferment status at risk through mistakes or malpractice by the QI. A QI that is properly and adequately covered can protect you with fidelity bond coverage and Errors and Omissions (E&O) Insurance.
Because you may not exchange properties on the same day, your QI will hold those funds for you until you purchase the next property. There's more than one way to hold funds, so it's vital you research this before choosing one.
If the QI segregates all funds into separate Trust or Escrow accounts, and the QI declares bankruptcy, you're in a better place to get your money back rather than watching it go to the QI's creditors. You also need to know exactly where those funds are held. Make sure the QI holds them in a bank insured by the FDIC (remember though, this insurance only covers up to $250,000).
Experience and Trustworthiness
What kind of experience does your QI have? How much business have they done as a QI, and how big is their company? What is the size of their typical transaction? Does their staff include a CPA or attorney they can easily consult with if your situation is more complex than a straightforward and simple 1031 Exchange? Have there been any complaints filed against them with organizations such as the Better Business Bureau or your state's Attorneys General? Has the representative been designated as a Certified Exchange Specialist? This is a designation demonstrating that they possess a certain level of experience and knowledge in their 1031 exchange service.
Taking advantage of the tax-deferred 1031 Exchange process is a great way to manage your investment wealth. But a big part of that is choosing a Qualified Intermediary or Accommodator that offers a proven 1031 exchange service. Don't hesitate to research them thoroughly, and don't be afraid to ask the right questions when choosing a 1031 exchange specialist.
While the information provided above has been researched and is thought to be reasonable and accurate, 1031 Crowdfunding are not lawyers or tax professionals. It’s important to consult with a licensed tax professional regarding your personal tax situation.