Your 1031 Exchange provider, who works chiefly as your qualified intermediary (QI), plays a critical role in the transaction. This party will hold your funds and oversee the entire exchange, ensuring that you remain compliant with IRS rules. If you choose a QI that isn’t reliable, then you’re increasing the chances of a failed exchange, immediate tax liability, and far-reaching financial consequences.
Realized 1031 shares tips on how to find a trustworthy 1031 Exchange provider. With this knowledge, you’ll be more confident when evaluating prospective partners for your upcoming transaction. Keep reading to learn more.
Finding a trustworthy provider goes beyond looking at experience or past reviews. There must be structural safeguards that demonstrate professionalism and compliant processes. Here are some of these characteristics.
One of the most critical insurance coverages for entities like QIs is the fidelity bond coverage. This is the insurance that protects the investors’ funds if a QI “disappears” or if an employee commits acts like embezzlement or theft. When choosing a 1031 Exchange provider, make sure that they have fidelity bond coverage with substantial worth. The average range is between $1 million and $100 million. Plus, the QI must be transparent with the limits relative to the volume of exchange funds it handles.
If fidelity bond coverage covers criminal acts, E&O insurance covers human errors. Given the IRS's strict rules, including deadlines and documentation requirements, any single error by the QI could lead to the exchange falling through. E&O provides assurance that even if the provider made a clerical error or failed to follow a deadline, you can receive compensation that covers the resulting tax liability. When evaluating the providers, you’ll want to determine if the insurance is per occurrence or an aggregate limit. The former is the better option.
A reliable QI must not commingle funds. In other words, they shouldn’t mix your funds with their own or those of other exchangers when they hold them in escrow. A reliable provider must create separate qualified escrow or trust accounts for your proceeds, allowing them to segregate your funds through your taxpayer identification number (TIN).
Security can also exist in the process, not just insurance coverage. A trustworthy QI must have protocols that protect outgoing wire transfers, one of which is the dual-signature disbursement system. This means that two separate senior officers within the firm must verify and approve the release of your funds.
1031 Exchange providers can come in two types: boutique QIs and institution-backed firms. The former are independent QIs who can reliably provide excellent services for your exchange needs. However, QIs owned by large title insurance companies or banks have the financial backing that adds another level of security for exchangers. Plus, these firms are subject to rigorous federal standards, corporate oversight, and regular audits that can’t be replicated by smaller firms. For high-value exchanges, the institutionally backed firms are generally the safer choice.
The firm's experts must have proven expertise in 1031 Exchanges. One certification you can look for is the Certified Exchange Specialist (CES) designation. This serves as proof that the QI professional has passed a comprehensive test and has years of full-time experience. Plus, those with CES designations have shown a commitment to following a code of ethics that makes them among the most trustworthy exchange professionals in the industry.
In addition to our 1031 Exchange service provider tips, we’ve shared some of the warning signs of an unreliable QI. If you see these red flags, it’s best to walk away and avoid future headaches.
In 1031 Exchanges, safe is better than cheap. Choosing a reliable provider becomes a critical aspect of any transaction to ensure that the transaction is a success. As such, apart from experience, investors should look at more tangible markers of reliability when assessing QIs. Having the right coverage, financial backing, processes, and credentials are some of the aspects you should look into to determine the best QI for your exchange.
https://www.1031.org/about-ces
https://www.investopedia.com/terms/e/errors-omissions-insurance.asp