Exploring the Role of Qualified Intermediaries in §1031 Exchanges

Who can act on behalf of an investor in a like kind exchange (AKA 1031 exchange) may be con­fus­ing at times. The investor may want the title com­pa­ny, attor­ney, finan­cial advi­sor or CPA to han­dle the exchange. The short answer is prob­a­bly not.

July 20, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

§1031 pro­vides a mech­a­nism for an investor to defer cap­i­tal gains on the sale of an invest­ment prop­er­ty. The investor must fol­low all the rules set by the Inter­nal Rev­enue Code (IRC) Sec­tion 1031. This sec­tion gov­erns these trans­ac­tions. Uti­liz­ing the ser­vices of a Qual­i­fied Inter­me­di­ary (QI) is required.  You may also hear the title accom­moda­tor.  The terms are more than like­ly inter­change­able.  We are a mem­ber of the asso­ci­a­tion of the Fed­er­a­tion of Exchange Accom­moda­tors.  Under­stand­ing the role of the QI is very impor­tant.

Qual­i­fied Inter­me­di­ary Roles and Respon­si­bil­i­ties

1. Guide and Facil­i­tate the Exchange:
   • The QI serves as an unre­lat­ed par­ty or mid­dle­man in the trans­ac­tion. This includes ensur­ing work­ing with the clos­ing agent on the relin­quished prop­er­ty. One of the most crit­i­cal aspects is to ensure the tax­pay­er does not have access to the pro­ceeds of the sale. Even tak­ing con­struc­tive receipt of the pro­ceeds of the sale can dis­qual­i­fy the exchange. If the sale is dis­qual­i­fied all cap­i­tal gains will be due. Defer­ring cap­i­tal gains may be the most impor­tant aspect of the sale for the investor.
2. Prepa­ra­tion of all Doc­u­ment:
   • There are a vari­ety of doc­u­ments that need to be pre­pared to pro­vide the nec­es­sary back-up to the exchange. This starts with the agree­ment between the QI and investor/exchangors. There may also be added doc­u­ments and notices sent to all par­ties to the sale includ­ing the buy­er of the relin­quished prop­er­ty.
3. Safe and Secure Hold­ing of Funds:
   • The pro­ceeds of the sale of the relin­quished prop­er­ty are not con­trolled by the exchang­ors. The pro­ceeds from the sale are held by the QI. The best method for hold­ing the pro­ceeds would be in a seg­re­gat­ed sep­a­rate account from oth­er exchang­ers’ funds. This may be one of the first ques­tions to ask the QI.  Depend­ing on the amount of funds being held and how long the QI holds the funds the ques­tion of who receives the inter­est may be a dis­cus­sion.
4. Under­stand the Tim­ing and Dead­lines:
   • Time may not be on your side! The IRS has strict time­lines that must be fol­lowed. The QI will mon­i­tor exchang­ers’ time­lines.
     • 45-Day Iden­ti­fi­ca­tion Peri­od: 45 days real­ly is 45 days.  There are no exten­sions.  The QI should be in con­stant con­tact with the exchang­ors to ensure any and all poten­tial prop­er­ties are iden­ti­fied (in adher­ence to the prop­er­ty rules).  One note to ampli­fy would be in the case of a Delaware Statu­to­ry Trust (DST) there would be an indi­ca­tion of the per­cent­age of own­er­ship as with all frac­tion­al own­er­ship inter­est. We will pro­vide a fol­low-up arti­cle regard­ing the interworking’s of the 45-day notice to the QI.
     • 180-Day Exchange Peri­od: Any prop­er­ties the exchang­ors wish­es to close on must be closed by 180 days from the sale of the relin­quished prop­er­ty.  Exchang­ors who iden­ti­fy prop­er­ties do not need to close on all prop­er­ties.
5. Com­pli­ance and Report­ing:
   • The QI is respon­si­ble to com­ply with reg­u­la­tions and require­ments of report­ing to the IRS on behalf of the exchang­ors. Then be sure that the exchange com­plies with all IRS reg­u­la­tion exchang­ors should also retain all records for future needs.
6. Exper­tise and Guid­ance:
   • Expe­ri­enced QI who has han­dled mul­ti­ple of exchanges can pro­vide addi­tion­al guid­ance to the first time exchang­ors.  There are a vari­ety of mis­steps that can trip up even expe­ri­enced exchang­ors.  One of the more con­fus­ing items

Impor­tance of a Qual­i­fied Inter­me­di­ary

• Com­pli­ance: The use of a QI is a legal require­ment for tax com­pli­ance in a §1031 exchanges. Step one is the use of a QI.  Not hav­ing a QI will dis­qual­i­fy the exchange from tax defer­ral ben­e­fits.
• Mit­i­ga­tion of Risk: The need for an unas­so­ci­at­ed or neu­tral third par­ty is manda­to­ry. The QI helps mit­i­gate risks asso­ci­at­ed with the trans­ac­tion. The improp­er han­dling of funds or missed dead­lines are two of the largest risks.
• Under­stand­ing the Process: The 1031 process can be stream­lined using the QI. QI typ­i­cal­ly have a very struc­tured and doc­u­ment­ed process.

How to Choose a Qual­i­fied Inter­me­di­ary

There are sev­er­al fac­tors to con­sid­er:

• Unreg­u­lat­ed Pro­fes­sion: A point to be aware of is that QIs are not reg­u­lat­ed by any finan­cial or licens­ing boards. Unlike CPAs, Attor­neys, Finan­cial Advi­sors or real estate bro­kers there are no exams, or cre­den­tials. 
• Pro­fes­sion­al Stan­dards: Many QIs are mem­bers of the Fed­er­a­tion of Exchange Accom­moda­tors. Being a mem­ber of a pro­fes­sion­al orga­ni­za­tion encour­ages best prac­tices as well as access to the lat­est leg­isla­tive rule changes affect­ing the exchang­ors and investors. We have used local and nation­al QIs.  Here is a link to the Fed­er­a­tion of Exchange Accommodator’s web­site.  Home (1031.org).  There are sev­er­al sources avail­able to the pub­lic.
• Expe­ri­ence and Rep­u­ta­tion: Many QIs can pro­vide a proven track record and pos­i­tive rep­u­ta­tion in facil­i­tat­ing §1031 exchanges.
• Finan­cial Com­pe­ten­cy: Pro­tect­ing the exchang­ors funds needs to be the most impor­tant goal of the QI. Change the finan­cial back­ing and appro­pri­ate safe­guards in place to ensure the exchang­ers’ funds are safe dur­ing the exchange.
• Com­mu­ni­ca­tion and Trans­paren­cy: Giv­en the strict time peri­ods com­mu­ni­ca­tion is vital.  There also needs to be trans­paren­cy in the agree­ment and fee struc­ture. Typ­i­cal­ly, the Qis will charge a flat fer for one exchange that includes the sale of the relin­quished prop­er­ty and the acqui­si­tion of the replace­ment prop­er­ty.  In the event of mul­ti­ple replace­ment prop­er­ties (as in the case of many DST acqui­si­tions) there may be a small addi­tion­al fee to han­dle addi­tion­al clos­ings includ­ing wire fees, etc. As finan­cial advi­sors we inter­face on behalf of the exchang­ors when uti­liz­ing a DST as a replace­ment prop­er­ty.

Sum­ma­ry:

The Qual­i­fied Inter­me­di­ary plays a piv­otal role in facil­i­tat­ing §1031 exchanges. With­out the QI there may be no exchange. QI will ensure com­pli­ance with IRS rules. Tax­pay­ers who want to defer cap­i­tal gains tax­es by rein­vest­ing in like-kind prop­er­ties need a QI. We have been very hap­py with the ser­vices our investors have reviewed with all the QI we have with on behalf of the investor.

This is for infor­ma­tion­al pur­pos­es only, does not con­sti­tute indi­vid­ual invest­ment advice, and should not be relied upon as tax or legal advice. Please con­sult the appro­pri­ate pro­fes­sion­al regard­ing your indi­vid­ual circumstance(s).

DSTs are not for all investors. The acqui­si­tion of a DST is for accred­it­ed investors only. Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC §1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus. Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor. NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion).

Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin-Sher­wood Rd, Suite 200 Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.