One of the 1031 exchange rules requires you to hire a Qualified Intermediary (QI). There is not one but many reasons why the IRS has included this rule in the set of 1031 exchange guidelines. You may know that a 1031 exchange lets you defer capital gains tax on the sale of an investment property. All you need to do is reinvest the sale proceeds into another like-kind property. Once you sold your property, your QI takes charge of your exchange. From locating a replacement property to closing the exchange, it’s your QI who performs all the tasks.
1031 Exchange Qualified Intermediary Role –
Why is it important to hire a QI?
You need an escrow account where you can deposit the sale proceeds. Upon hiring a QI, the first thing you do is transfer the funds in their bank account. This way, you fulfill one requirement of a 1031 exchange, which is, a 1031 exchange investor can’t touch the sale proceeds.
Identifying a like-kind property isn’t as easy as it may sound. You need to have contacts in the local real estate market along with a list of 1031 exchange properties. You may pull up these tasks, but many investors who can’t. That’s when Qualified Intermediaries come in handy. They locate the property for you and submit your identification before the deadline.
Don’t think that there is nothing left in your 1031 exchange once you’re done with property identification. You haven’t yet acquired the replacement property. Your QI stays in touch with the seller and buys the property as early as possible. Not having a QI will make you do all these things.
You’re still not done. What about closing the exchange? One the closing day, your QI deposits the funds in the seller’s account and receives the ownership of your new property. Once all the paperwork is done, they transfer the property title in your name.
How to choose the right QI?
- Experience is what you should be considering first while choosing a QI. Think of it as – the more experienced QI, the earlier you will complete your 1031 exchange.
- Background comes next. All those years, when your QI was active, how many 1031 exchanges have they closed? This is a matter of research. Having an abundance of knowledge and performing in the market are two different things.
- Reputation always matters. Someone with a good reputation is likely to receive more responses than one with a stained image. The previous records of your QI should be enough to reveal their reputation.
- Intelligence could be a great savior. Say, something goes horribly wrong in the middle of your 1031 exchange, and you fail to identify a replacement property. What’s next? Should you consider your 1031 exchange gone? No. An intelligent QI will still make your 1031 exchange by suggesting your different alternates like a DST investment. Plus, they will also find you some great DST investment properties and close your 1031 exchange.
As you can see, it’s essential for your QI to have all these qualities. Therefore, you may need to do a lot of research before you could finalize a QI. It’s completely alright. You don’t need to rush. If a little bit of delay can result in a good deal, you must go for it.