Most savvy investors understand the importance of a sound tax strategy when making an investment decision. Therefore, it is no wonder that utilizing a like-kind exchange (LKE) when buying or selling real estate, or other business use assets, remains a primary wealth and tax strategy amongst investors both large and small. Unfortunately, many investors are blindly allocating the responsibility of managing their 1031 exchange to a local attorney, CPA, or banker.
So why could this be a mistake? Think of it like this; would you go to a local commercial real estate broker and ask them for advice on purchasing your next home? Probably not, because while they know and understand the market and real estate, they don’t know the residential market. A commercial broker will not have any familiarity of all the critical issues related to residential transactions - issues like what neighborhoods are booming, ideal size and floorplan for certain size of family, what areas have strong school districts, proximity to public transportation, etc.
Similarly, if you are looking to utilize a tax strategy like a 1031 exchange that needs to follow very strict set of guidelines why put your money in the hands of someone who may not understand its intricacies. Here are a few of the numerous reasons for engaging a qualified intermediary (QI) when conducting a 1031 exchange:
- A qualified intermediary’s involvement with the Federation of Exchange Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s (FEA), the industry trade association for QIs, keeps them up-to-date on issues that may impact your exchange.
- The FEA recommends that QIs hold a Fidelity Bond and Errors & Omission Insurance.
- Many states have specific regulatory requirements targeting LKEs, and QIs are up-to-date on all state requirements.
- QIs will utilize segregated commercial accounts, qualified trust accounts and/or escrow accounts, offering multiple security measures to safeguard the taxpayer’s funds.
- Sophisticated QIs will have the capability to understand, handle, and process all kinds of exchanges, including forward, reverse, built-to-suit, and improvement exchanges.
The above list indicates many great reasons to use an experienced QI for a 1031 exchange. However, not all QIs are created equal, and it’s important that, when setting out to conduct a 1031 exchange, one exercises due diligence in researching your qualified intermediary. The above list can provide pertinent questions to ask during the process.