The treasury regulations envision the qualified intermediary as being a neutral third party in a 1031 exchange - someone who is not beholden to the tax payer. The taxpayer’s agents, employees, and relatives are all disqualified from being the qualified intermediary. In particular, anyone that’s been your agent or employee in the two years preceding the sale of the relinquished property cannot act as your QI.
So your attorney who has been your employee or your agent or your accountant is disqualified from being your qualified intermediary.
Choosing the Right Qualified Intermediary
Most qualified intermediary companies are separate independent companies that operate in this space exclusively. This is their bread and butter business and that’s what they do day in and day out. That’s who you want to use for your QI. Sometimes taxpayers will put a clause in their exchange agreement asking the qualified intermediary to make a representation that they are in fact a qualified party acting as the QI (i.e. they’re not the agent or employee of the taxpayer). This is not a bad idea, and is something you want to make sure that you address that with your QI.
When you’re choosing a qualified intermediary for your 1031 exchange, the caveat – buyer beware, is the name of the game. Properly vetting your qualified intermediary is one of the most important steps of a 1031 exchange. Not all qualified intermediaries have insurance, fidelity bonds, or other safeguards in place to protect your funds.
Here are a few questions to ask your qualified intermediary during the selection process:
- Do you have a separate segregated escrow account for each client?
- What is the level of insurance for each claim and what is the total amount of insurance that’s applicable in the event of an adverse situation?
When a qualified intermediary holds your money, ideally they will have a separate escrow account so your funds are not co-mingled with any other client funds or with the operating account of the qualified intermediary. Furthermore, you want to make sure that they have a dual signature account where the bank requires 2 signatures (your co-signature and the QI’s) for the release of funds. That will prevent someone from absconding with your funds or investing them in any way that would be disadvantageous to you.
- 1031 Hotline: If you have questions about who can act as your qualified intermediary, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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