How to find a qualified intermediary for a 1031 exchange?

Question

What steps should I take to identify and select a qualified intermediary for facilitating a 1031 exchange, ensuring they meet the necessary legal and regulatory requirements to handle the transaction effectively and in compliance with IRS guidelines?

ARTE's Answer

Finding a qualified intermediary (QI) for a 1031 exchange is a crucial step in ensuring that your exchange is executed smoothly and in compliance with IRS regulations. A QI plays a pivotal role in facilitating the exchange process by holding the proceeds from the sale of your relinquished property and using them to acquire the replacement property on your behalf. Here’s a detailed guide on how to find a qualified intermediary, with an example to illustrate the process.

  1. Research and Recommendations: Start by researching potential QIs. Look for companies with a strong reputation and extensive experience in handling 1031 exchanges. You can ask for recommendations from real estate professionals, such as real estate agents, attorneys, or accountants, who have experience with 1031 exchanges. They can provide valuable insights into reputable QIs they have worked with in the past.
  2. Verify Credentials: Ensure that the QI is knowledgeable about the IRS regulations governing 1031 exchanges. While there is no formal certification for QIs, many reputable intermediaries are members of professional organizations such as the Federation of Exchange Accommodators (FEA), which promotes high standards and ethical practices in the industry.
  3. Evaluate Services and Fees: Compare the services and fees of different QIs. Some QIs, like us at Deferred.com, offer a "No Fee Exchange," which can save you money. It’s important to understand what services are included in the fee structure and whether there are any additional costs involved.
  4. Check for Financial Security: Since the QI will be holding your exchange funds, it’s essential to ensure that they have adequate financial security measures in place. This includes having a separate escrow account for each exchange and being bonded or insured to protect your funds.
  5. Review the Exchange Agreement: Before selecting a QI, review the exchange agreement carefully. This document outlines the responsibilities of the QI and the terms of the exchange. Make sure you understand the agreement and that it aligns with your exchange goals.

Example: Let’s say you own a rental property worth $500,000 and you want to exchange it for a commercial property of equal or greater value. You decide to use Deferred.com as your qualified intermediary because of our "No Fee Exchange" offer and our reputation for excellent service.

  1. Engagement: You contact us at Deferred.com and we provide you with an exchange agreement to review and sign. This agreement outlines our role in the exchange process and the steps involved.
  2. Sale of Relinquished Property: You sell your rental property for $500,000. Instead of receiving the proceeds directly, the funds are transferred to us, your QI, to hold in a secure escrow account.
  3. Identification of Replacement Property: Within 45 days of selling your relinquished property, you identify a commercial property worth $600,000 as your replacement property.
  4. Acquisition of Replacement Property: Within 180 days, we use the $500,000 held in escrow to purchase the commercial property on your behalf. You arrange for additional financing or cash to cover the remaining $100,000.
  5. Completion of Exchange: Once the transaction is complete, you have successfully deferred capital gains taxes by reinvesting in a like-kind property through a 1031 exchange, facilitated by Deferred.com.

By following these steps and using a reputable QI like Deferred.com, you can ensure a smooth and compliant 1031 exchange process. If you have any further questions or need assistance, feel free to reach out to us at Deferred.com.

Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.

Deferred's AI Real Estate Tax Expert (ARTE) is a free research tool. Trained on 8,000+ pages of US tax law, regulations and rulings, ARTE outperforms human test takers on the CPA exam. This is page has ARTE's response to a common 1031 Exchange question and should not be considered personalized tax advice.

Sources

Learn More

See more frequently asked questions about 1031 exchanges

How many properties can you identify in a 1031 exchange?
What is the maximum number of potential replacement properties that a taxpayer can identify when conducting a 1031 exchange, and are there any specific rules or limitations that govern this identification process?
Can a single member llc do a 1031 exchange?
Can a single-member LLC, which is treated as a disregarded entity for federal tax purposes, engage in a 1031 exchange, and if so, what are the specific considerations or requirements that must be met to ensure the exchange qualifies for tax deferral under Section 1031 of the Internal Revenue Code?
Can you use 1031 exchange for new construction?
Can a 1031 exchange be utilized to defer capital gains taxes when exchanging an existing property for a newly constructed property, and what are the specific requirements or considerations involved in such a transaction?
What happens to depreciation in a 1031 exchange?
How is depreciation handled for properties involved in a 1031 exchange, and what are the implications for the carryover basis and any excess basis in the replacement property?
Should i do a 1031 exchange?
Given my expertise in real estate tax and 1031 exchanges, your question could be interpreted as: "What are the potential benefits and considerations of engaging in a 1031 exchange for my investment property, and how might it impact my tax situation and investment strategy?"