By Justin Amos, JTC Group
To successfully complete your 1031 exchange, you’ll need a Qualified Intermediary (QI). Here are a few key factors to consider when choosing the right one.
For over 100 years, investors have used IRC Section 1031 Like-Kind Exchanges to defer capital gains taxes and depreciation recapture on the sale of real estate held for investment or used in a trade or business. A powerful wealth-building tool, 1031 can be a smart investment strategy for real estate owners. Yet, one critical requirement – often overlooked but essential to a successful exchange – is selecting the right Qualified Intermediary.
The QI holds the proceeds from the sale of the relinquished property until the replacement property is purchased, ensuring the investor never takes possession of the funds. To successfully complete a 1031 exchange, selecting the right QI is just as important as having one. Here are key tips to simplify your due diligence process:
Not all friends know best – Many people pick a QI based on a friend’s recommendation or a quick online search. That’s too risky. Due diligence is essential. Understand what type of QI you need and retain the most qualified one.
Not all exchanges are the same – In a forward exchange, the relinquished property sells first. In a reverse exchange, the replacement property is acquired first. Each exchange is unique, so your QI must accommodate your specific situation.
Mind the bank – Your QI holds your sale proceeds between closings, so fund security is key. Choose a QI with strong controls, ensuring funds are in FDIC-insured, fully liquid accounts at top-tier banks – never commingled in operating accounts. Funds should only be released from escrow with approval from both the QI and the exchanger. Some QIs work with only one bank, so if their bank isn’t your preference, you could be stuck with a partner you don’t trust. Get that information and details upfront before signing on the dotted line.
As good as the company you keep: Look for a QI with strong relationships with trusted CPAs and attorneys across the industry and the U.S. Since IRS regulations prohibit QIs from providing tax advice, you’ll need a CPA or attorney to guide you through your exchange.
Access to information at your fingertips – Your QI should offer 24/7 access to information on where your money is held. Transparency matters. A strong QI provides a robust reporting system that records and archives all exchange events, offers a full audit trail, and lets you monitor account activity anytime, from anywhere.
Some QIs are rock stars: To ensure compliance with federal and state tax laws, a QI should submit to an annual third-party audit of its business practices and technologies. Exceptional QIs go beyond the minimum requirements and undergo regular reviews of their technologies, procedures, and control objectives like we do at JTC Group.
Justin Amos, a 1031 Exchange executive at JTC Group, is a recognized expert in tax-advantaged investments, including DSTs and Opportunity Zones.