There are several considerations when choosing a qualified intermediary for your 1031 Like-Kind Exchange.
- The regulations governing 1031 exchanges clearly articulate who cannot be your qualified intermediary.
- Knowing what not to do can assist you in finding the right qualified intermediary for your transaction.
- The role of a qualified intermediary (QI) is integral to a 1031 Like-Kind Exchange to manage the financial, administrative, and sophisticated reporting requirements.
It is important to choose a representative who is established, accountable, and has a strong understanding of the IRS code.
- Choosing based on price–While fees are relevant to the decision, they should not be the determining factor. Like-Kind Exchanges are highly technical legal transactions, requiring the assistance of skilled and experienced professionals. Just as you wouldn’t hire a heart surgeon based on fee, you shouldn’t hire your qualified intermediary based on fee.
- Location–Choosing your qualified intermediary is not like buying a quart of milk. Hiring a QI because their office is local, or convenient to your attorney’s office, is also not the way to select your QI. IRC §1031 Like-Kind Exchanges are based on the Internal Revenue Code, a federal tax law. The vast majority of the rules and case law are also federal in nature, and many exchange transactions involve properties in multiple states and regions. Always be sure that the qualified intermediary you choose has the resources to remain current with the state and the federal rules.
- Ignoring financial stability–Some intermediaries tout the fidelity bonds are signs of their security. In the event that those QIs suddenly close their doors, those bonds typically require that the claim be made by the failed QI, not by the taxpayer. Moreover, the taxpayer rarely, if ever, has access to the bonding information. And when the time comes to make a claim, the bonding company starts with a detailed investigation to determine whether to even pay the claim.
- Lack of experience–There is currently no federal licensing or registration requirement to become a QI, and only a handful of states impose any regulation on the industry. Some firms have developed their own “certification” programs for their employees. These are not the same as the Certified Exchange Specialist® designation, the only independent, tested designation in the industry, offered through the Federation of Exchange Accommodators. Designees must prove industry experience before being able to take a rigorous test, assessing all aspects of 1031 exchange knowledge.
- Blurring the line between qualified and disqualified–Sometimes taxpayers are led astray by ill-informed advisors. The regulations governing 1031 exchanges clearly articulate who cannot be your QI, including your attorney and certain other professionals. Additionally, some attorneys or accountants refer their 1031 exchanges to a friend or to a business in which they are part owners, creating potential conflicts of interest.
Wilmington Trust 1031 Exchange LLC (WTEX1031) is a nationwide provider of qualified intermediary services. Our professionals have facilitated exchanges of all kinds in nearly every state, and internationally. They will coordinate with your attorney and other professionals to facilitate a smooth transaction at every step. We can help you complete both the disposition of your existing asset and the acquisition of your new one–from contract to closing.
IRC Section 1031 allows taxpayers to defer the gain on the disposition of business or investment real estate, if that real estate is replaced with like-kind real estate, within specific timeframes. Consult your tax or legal advisor for additional information on the requirements and limitations of such exchanges. Wilmington Trust 1031 Exchange LLC is a wholly owned subsidiary of Wilmington Trust, N.A. *Wilmington Trust 1031 Exchange LLC does not provide tax or legal advice to clients.