A qualified intermediary (QI) is one of the most important people you’ll interact with during a 1031 exchange. For that reason, you’ll want to find a reputable QI to work with you through the exchange process.
What role does the QI play in a 1031 exchange, and can they help identify a replacement property? These are questions we’ll answer in this article.
QIs aren’t regulated, so choosing one requires lots of research to ensure the one you land on is knowledgeable, experienced, and has the resources to manage your 1031 exchange.
The QI is an independent third party that is not related to you. This means it cannot be your realtor, bank lender, escrow agent, title agent, attorney, or family member.
So, what exactly do you look for when choosing a QI? In addition to someone knowledgeable and experienced, they should have adequate resources. This includes errors and omissions insurance. They should deal with a bank that can insure funds above the FDIC limit of $250,000.
You’ll want to check which states they work in and the types of exchanges they do. When checking experience, the more 1031 exchanges they have performed, the better.
Checking the QI’s online reviews and BBB stats can be helpful. Checking QIs used by title insurance companies is another good place to find information about them.
While QIs are not regulated, you can also check the Federation of Exchange Accommodators.
Once you’ve settled on a few potential QIs, start communicating with them well ahead of your 1031 exchange. You want to know that the QI has good communication and responds quickly. You only have 45 days to identify a property once the exchange starts, so fast and efficient communication is critical.
Putting in the time and research to find a reliable QI is essential. If your exchange fails to meet its deadlines because of problems with the QI, you will have to pay taxes on the sale of your property. Worse, if you choose a QI who decides to run off with your funds, you’ll not only be out your funds, but also have to pay taxes on the sale of your property.
Your QI holds the replacement property until the 1031 exchange transaction is completed. They don’t really help you with identifying a property. That will be on you and your realtor. That doesn’t mean the QI doesn’t have an important role. They have one of the most important roles in a 1031 exchange for all the above reasons.
You’ll want to get the jump on property identification. Just like choosing a QI before starting a 1031 exchange, it is generally better to have a few properties narrowed down before starting your exchange. If you start from scratch on day one, you’ll probably find that 45 days is not enough time to identify a replacement property.