1031 Blog

Stay up-to-date on the latest 1031 News

Join the Crowd

What is a Qualified Intermediary?

Did you know... A 1031 Exchange Qualified Intermediary (often referred to in the real estate industry as a 1031 Exchange Accommodator or 1031 Exchange Facilitator) is a crucial part of any successful 1031 Exchange transaction?

The last thing you want when you think you’ve completed a 1031 exchange, is to receive a tax bill. The truth of the matter is that the Internal Revenue Service (IRS) has the ability to invalidate a 1031 exchange and charge you capital gains taxes on the sale if the disposition and acquisition transactions were not completed within the 1031 exchange regulations.

So how do you ensure your capital gains taxes do not appear on your tax return after you’ve completed a 1031 exchange? There’s an easy answer: Engage a reputable Qualified Intermediary (QI). The job of the QI is to help you navigate the complicated 1031 exchange process, helping you properly comply with each of the exchange code’s regulations and requirements.

A QI is an independent entity that is not the investor, an agent of the investor, or a related party to the investor that enters into a written agreement with the investor to complete the exchange transactions on behalf of the investors for the purpose of adhering to 1031 exchange requirements.

One of the main functions of the QI is to restrict the investor’s access to the sale proceeds after the sale of the relinquished property. Taxpayers are required to pay taxes on any income received in any given year. In order to defer paying taxes on one’s income, the taxpayer must defer receipt of that income by avoiding both actual receipt and constructive receipt of that income.

Actual receipt of income is fairly uncomplicated, meaning that the taxpayer directly receives the actual income into their possession, placing it in their personal bank account or spending it according to their wishes. Constructive receipt, on the other hand, refers to income that is not directly paid to the taxpayer, but placed under the taxpayer’s control for them to access, administer or distribute as they determine.

In a delayed 1031 exchange, the category in which most exchanges fall, the sale proceeds are not directly transferred to the seller of the replacement property and must be held until the closing of a replacement property. To avoid a taxable event through actual receipt or constructive receipt of these funds, the investor cannot accept or hold the sale proceeds from the sale of the relinquished property. The Safe Harbor rules, as listed in IRS Section 1.103, require the investor to use a QI to act as an escrow holder for these funds. The ownership of the property to be sold is transferred to the QI, which then sells the property and holds the sale proceeds until a like-kind replacement property is purchased by the QI with the fund being held. At that time, the QI then transfers ownership of the replacement property to the investor, leaving the investor in possession of property rather than funds.

It is important to choose a QI carefully since there is little state or federal regulation on QIs. With no licensing requirement, any agent can become a QI as long as they do not fall into one of the few categories that are restricted from acting as a QI, such as accountants, attorneys and realtors who have served the taxpayer in their professional capacities within the prior two years, or any person or party related to the taxpayer. Furthermore, QIs often hold large sums of money on behalf of the investors they serve and often do not have a guarantee of security on those funds in the case the QI were to become bankrupt.

Different QIs may make different decisions on how the funds are pooled and invested during the time in which the QI has possession. QIs have different fee structures. Some may charge a flat rate while others may take into consideration the interest earned on the funds during the period the funds are held. Likewise, the interest earned on the funds may be paid in different ways by different QIs.


Sample of services offered by one of our QI partners:

  • Confers with each Exchanger's attorney and/or tax advisor and forwards legal documentation, as requested, so that the IRC §1031 rules and regulations are thoroughly understood
  • Prepares the necessary documentation - Exchange Agreement, Assignment(s), Notice of Assignment(s), Qualified Exchange Account Form, Security of Funds Instruments and Instructions to each Closer/Escrow Officer - and oversees each closing to assist in proper §1031 procedures
  • Via the proper exchange documentation, consummates the sale of the relinquished property and the purchase of the replacement property
  • Holds and protects the exchange proceeds on behalf of the Exchanger until funds are needed to purchase the replacement property
  • Provides guidance, information and critical timelines throughout the entire exchange

Suggested Questions for Your QI

While there are many other things to consider when engaging a QI, Exeter 1031 Exchange Services, one of our QI partners, suggests the following list of some of the most important due diligence questions to ask a prospective QI:

  • How many years have you been administering 1031 Exchange transactions?
  • How many 1031 Exchanges have you administered (individual 1031 Exchange officer and 1031 Exchange Qualified Intermediary)?
  • Do you hold clients' 1031 Exchange funds in a segregated Qualified Trust Account or a Qualified Escrow Account?
  • Do you maintain fidelity bond insurance coverage to insure against employee theft, embezzlement or misappropriation of the 1031 Exchange funds?
  • What is the policy limit of your fidelity bond coverage?
  • Is your fidelity bond coverage “per occurrence” or merely “in aggregate”?
  • Will you provide me with copies of your insurance binders and the contact information for your insurance agents so I can verify that your insurance coverage is still in full force and effect?
  • Do you maintain sufficient errors and omissions (E&O) insurance coverage to insure against any 1031 Exchange Qualified Intermediary error or omission?
  • What is the policy limit of your errors and omissions insurance coverage?
  • Do your fidelity bond and errors and omissions (E&O) insurance policies cover just the 1031 Exchange Qualified Intermediary or do they also cover numerous other related entity operations that might diminish the overall protection to me in the event of multiple losses throughout the consolidated entity such as title insurance, escrow, etc.?
  • What type of internal processes and internal audit controls have you implemented to protect my 1031 Exchange assets?
  • Do your 1031 Exchange administrators call me prior to the disbursement of my 1031 Exchange funds to ensure that I want the funds disbursed (as opposed to disbursing when escrow calls)?
  • Where are my 1031 Exchange funds held or invested?
  • What type of specific investments do you use for my 1031 Exchange funds?

  • How many years have you been administering 1031 Exchange transactions?
  • How many 1031 Exchanges have you administered (individual 1031 Exchange officer and 1031 Exchange Qualified Intermediary)?
  • Do you hold clients' 1031 Exchange funds in a segregated Qualified Trust Account or a Qualified Escrow Account?
  • Do you maintain fidelity bond insurance coverage to insure against employee theft, embezzlement or misappropriation of the 1031 Exchange funds?
  • What is the policy limit of your fidelity bond coverage?
  • Is your fidelity bond coverage “per occurrence” or merely “in aggregate”?
  • Will you provide me with copies of your insurance binders and the contact information for your insurance agents so I can verify that your insurance coverage is still in full force and effect?
  • Do you maintain sufficient errors and omissions (E&O) insurance coverage to insure against any 1031 Exchange Qualified Intermediary error or omission?
  • What is the policy limit of your errors and omissions insurance coverage?
  • Do your fidelity bond and errors and omissions (E&O) insurance policies cover just the 1031 Exchange Qualified Intermediary or do they also cover numerous other related entity operations that might diminish the overall protection to me in the event of multiple losses throughout the consolidated entity such as title insurance, escrow, etc.?
  • What type of internal processes and internal audit controls have you implemented to protect my 1031 Exchange assets?
  • Do your 1031 Exchange administrators call me prior to the disbursement of my 1031 Exchange funds to ensure that I want the funds disbursed (as opposed to disbursing when escrow calls)?
  • Where are my 1031 Exchange funds held or invested?
  • What type of specific investments do you use for my 1031 Exchange funds?

AUTHORIZED PARTNER

CrowdPay is an FDIC insured bank account that you can use to purchase investment opportunities. You fund your CrowdPay account by ACH or wire transfer. All future dividends, interest payments, as well as revenue sharing payments will be placed into your CrowdPay account. You have the option to transfer funds into the account, withdraw funds from the account, or purchase additional assets at any time.

The account is held by GoldStar Trust Company, a trust only branch of Happy State Bank, and cash that accumulates in your new CrowdPay account is FDIC insured. Please follow the below link for additional important information regarding your CrowdPay account.

Learn More