What are the different advisory roles needed to execute a 1031 exchange successfully? You'll have direct interaction with some of the people involved with your 1031 exchange. At the same time, others will be behind the scenes, although they are just as important. In this article, we'll look at the different roles you'll interact with when executing a 1031 exchange.
Qualified Intermediary (QI)
A QI is someone who transfers proceeds from the relinquished property to the replacement property. A 1031 exchange has strict rules about how to handle sale proceeds. Basically, the property owner cannot benefit or come into contact with the funds. That’s where the QI comes in.
The QI is one of the most most important people you’ll be in contact with when executing a 1031 exchange. They are the main facilitator of the exchange. The QI ensures all 1031 exchange rules are followed, and all deadlines are met. They can meet with your other advisors to answer questions and offer guidance.
When choosing a QI, verify that they experienced, licensed, bonded, and insured. The QI industry is not regulated. If you are having difficulty finding a QI, the Federation of Exchange Accommodators might be a good place to start.
Real Estate Agent
Since a 1031 exchange involves at least two different properties, there’s a chance you might be working with more than one real estate agent. What role does your real estate agent play in the 1031 exchange process?
The real estate agent’s role doesn’t really change when a 1031 exchange is involved. They still provide guidance during the transaction to the property owner. However, it is best to use an agent who is familiar with the 1031 exchange process. Using an inexperienced real estate agent can add some unknowns and potential delays.
A tax advisor or CPA’s role also doesn’t change when a 1031 exchange is involved. As with the real estate agent, it's better to choose advisors who are knowledgeable about the 1031 exchange process.
A tax advisor can help with the transaction timing since they will be familiar with the property owner's current tax situation.
A financial advisor helps clients meet their financial goals and handle current financial situations. They may be able to offer some advice about how a 1031 exchange fits into the property owner’s overall financial picture. This can also play into timing the transaction.
The financial advisor and tax advisor may have overlapping roles.
Depending on state laws, this is an optional advisory role. Some states require a real estate attorney to complete real estate transactions. Some people may use an attorney for their QI. That's a personal preference, as being an attorney is not a requirement for a QI (and can cost a lot more).
A 1031 exchange is a complex process. Violating any of the 1031 exchange rules can invalidate the entire process, resulting in a taxable rather than a tax-deferred event. Knowing the different roles involved can help lead to a smoother 1031 exchange transaction.