Considering a 1031 exchange to defer your capital gains? You'll need a Qualified Intermediary, but finding the right one can be challenging. Here we cover what we think makes a great Qualified Intermediary and provide a few recommendations.
What is a 1031 Exchange?
A 1031 exchange, also called a like-kind exchange or a tax-deferred exchange, is a tool real estate investors can use to avoid capital gains taxes. When selling a property, the investor can work with a Qualified Intermediary to re-invest the proceeds into a replacement property, and when done successfully they can defer all capital gains taxes from the sale. One major requirement for this process is that a Qualified Intermediary must hold on to all of the funds throughout the exchange process for a 1031 exchange to qualify. Check out our comprehensive overview to learn more about how 1031 exchanges work.
What makes a great Qualified Intermediary?
Working with a Qualified Intermediary is a requirement for a successful 1031 exchange. Choosing the right intermediary is important because they will structure the exchange, draft the exchange documents, and most importantly hold your exchange funds throughout the process. When trying to decide who to trust with your 1031 exchange, we think you should look for these things:
Experience and Expertise
A great Qualified Intermediary can help you understand the exchange rules and guide you through the process. You can expect your intermediary to be knowledgeable about the process and be able to answer questions about your specific situation - from qualifying property to navigating holding entities to dealing with multiple owners.
You should also expect your Qualified Intermediary to be easy-to-reach and responsive throughout the process. Some things to look for:
- Does someone answer when you call them? Are they quick to call you back or respond to text messages?
- Does the team have experience doing exchanges? Does anyone on staff have previous experience as an attorney or CPA?
- Do they have good customer reviews? Did customers with a similar situation have a good experience?
Security of Funds
When choosing a Qualified Intermediary, we also think the best ones can describe how they protect your money.
- Do they hold your funds in segregated accounts? Or are they commingled with other customer’s money?
- What controls do they have in place before sending money? Do they require your authorization before moving your funds?
- Do they have a fidelity bond in place to protect your funds?
- For very large transactions, do they have a sufficient level of FDIC coverage with their banking partner?
- Do they have appropriate levels of insurance coverage in case of an issue?
Fair Price
A great Qualified Intermediary offers fair pricing. Some exchanges are complicated, requiring many sales and purchases, navigating laws from multiple states, and collaboration with other tax attorneys and accounts. Other exchanges are fairly simple and straightforward. You wouldn't expect to pay the same amount to exchange two skyscrapers as you would buying and selling two duplexes. The right partner has the expertise to handle your transaction and charges a competitive price for the service.
We also believe a great Qualified Intermediary is transparent in how they make money and are upfront about their fees. Some questions you can ask:
- Do you earn interest from holding my funds? If so, how much interest will I earn?
- Do you charge an exchange fee? If so, how much?
- Do you charge additional fees throughout the process?
- Fees for each wire transfer or issuing of a check?
- For additional sales or purchases?
- Rush fees for quick closings?
- Fees for alternative investment closings, like DSTs?
