In real estate investing, the 1031 exchange is a powerful tool. But as with any strategy that involves significant assets and IRS rules, the details matter. One of the most important details in a 1031 exchange is choosing the right Qualified Intermediary (QI).
A QI is an administrator of 1031 exchanges. They are entrusted to hold exchange funds and correctly prepare essential documentation. Yet unlike banks, trust companies, or registered investment advisors, QIs are largely unregulated. That makes due diligence not just smart, but essential.
Why Qualified Intermediary Due Diligence Matters
Without a qualified, trustworthy intermediary, investors run the risk of:
Loss of Funds: In extreme cases, fraud or mismanagement has led to investors losing millions in 1031 exchange proceeds.
Disqualified Exchanges: Errors in documentation or timing can invalidate the 1031 exchange, triggering a large and unexpected tax bill.
Disruptions or Delays: Operational inefficiencies may cause frustration and even missed deadlines, which may put the exchange in jeopardy.
When you hand over your proceeds from a sale, you are not just trusting the QI with your money, you are trusting them with your tax deferral strategy and long-term financial goals.
Key Areas to Evaluate in a 1031 Exchange Qualified Intermediary
Not all QIs are created equally. Here are the core areas investors should consider when vetting an intermediary:
Financial Safeguards. Ask how client funds are held. Are they kept in separate, segregated accounts, or commingled with other clients’ money? Are they FDIC insured? The more transparent and secure the structure, the better protected you are.
Compliance and Documentation. A good QI will provide clear, accurate exchange agreements and ensure that all IRS timelines are tracked and met. Sloppy paperwork is a red flag.
Experience and Track Record. Look for a QI with decades of experience. Ensure the QI is well-versed in handling exchanges of different sizes and complexities. Ask about their experience: How many exchanges do they handle annually? How long have they been in business?
Operational Integrity. What controls are in place to ensure your transaction will run smoothly? Does the QI work with legal and tax advisors when needed? Is your QI also a tax attorney?
Transparency and Communication. 1031 exchanges involve tight deadlines and multiple parties. A reliable QI will be responsive, accessible, and clear in their communication.
Questions to Ask Before Choosing a QI for Your 1031 Exchange
When conducting due diligence, consider asking questions that go beyond the basic understanding of IRS rules:
How are 1031 exchange funds held and protected?
What insurance or bonding do you carry?
Can they provide references or case examples?
What internal controls prevent errors or fraud?
The goal is to confirm that you are working with a professional who values transparency and accountability as much as you do.
The Bigger Picture: Trust, but Verify
A 1031 exchange can fuel long-term wealth building without the drag of unnecessary taxation. But the wrong QI can turn that opportunity into a costly mistake. By taking the time to vet your QI with the same rigor you apply to your investments, you are protecting not just your money, but your future.
Due diligence is not about distrust; it’s about building a foundation strong enough to leave no room for mistrust.
If you are considering a 1031 exchange, feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.
Defer the tax. Maximize your gain.
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