You need a 1031 Qualified Intermediary to complete your 1031 exchange, so here are a few things to consider to make sure you pick the right one. For more than 100 years, investors have been able to defer capital gains taxes and depreciation recapture from the sale of business real estate through the use of a Section 1031 Like-Kind Exchange. A useful tool for building wealth, 1031 can be a smart investing strategy for those with investment properties.
In order for your transaction to qualify as a like-kind exchange under the tax code, certain rules must be followed, one of which is that the replacement property must be identified within 45 days of the sale of the relinquished property, and the purchase completed within 180 days. Another is that all 1031 exchanges must involve the use of a Qualified Intermediary.
The QI, or Qualified Intermediary, holds the proceeds from the sale of the relinquished property until the replacement property is purchased, so that the sale proceeds are never in the investor’s possession. If you want to perform a 1031 exchange, you need a QI.
Many people select their 1031Qualified Intermediary based on a friend’s recommendation or some basic Internet research without really understanding what they should be looking for. To help make your decision easier, here are a few questions you should ask yourself to determine if you’ve found the correct QI for your exchange:
1. Does your 1031 Qualifed Intermediary have experience with the type of exchange you want to perform?
There are different ways to perform a 1031 exchange, including forward exchanges, where the relinquished property is sold first, and reverse exchanges, where the replacement property is found first. Each exchange is unique, and you need a QI that can accommodate your specific situation.
JTC offers expertise in all manner of exchange scenarios, including both forward and reverse exchanges, as well as specific expertise in the use of Delaware Statutory Trusts. This experience sets us apart from our competitors because we have the knowledge and capability to facilitate even the most difficult exchanges. Regardless of the particulars of your exchange scenario, JTC’s experts are ready to work with you to understand your needs and provide the necessary solutions, something you won’t get with everyone else.
2. Are exchange funds being held in an FDIC-insured account for maximum security?
The 1031 Qualified Intermediary is tasked with holding the sale proceeds between closings. This is your money, so of course you want it to be safe, which is why it’s important to know what controls are in place for the security of funds. A good QI should ensure that your funds are held at top-tier banks, and should have specific policies in place to provide peace of mind.
Our team wrote a set of best practices for the 1031 industry, with stringent measures to ensure fund security. Exchange funds are only held in FDIC-insured, fully liquid accounts at highly-rated banks, and are placed in individual qualified escrow accounts, never comingled in operating accounts. Funds are released from escrow only with approval of both the QI and the exchanger. With JTC, you’ll be able to rest easy knowing your funds are secure.
3. Is your 1031 Qualified Intermediary free to work with any bank, or limited to working with a specific one?
Many QIs are aligned with a single bank that they use to hold exchange funds. If your preferred bank is not the same as your QIs, you could be stuck with a banking partner you don’t like. But there’s no reason to settle: having a QI with the freedom to work with multiple banking partners means you won’t be forced to work with a certain bank. JTC has longstanding relationships with many of the nation’s leading banks and can work with clients either to find them the right banking partner or use the client’s bank of choice.
This flexibility is also important for security reasons: FDIC insurance only covers $250,000 of a deposit. But what do you do if you have more money than that being held? Due to our relationships, JTC can spread your exchange funds among several banks to provide more FDIC insurance coverage.
JTC also has established and trusted relationships with CPAs and attorneys from throughout the industry. IRS regulations state Qualified Intermediaries may not provide tax advice, so you’ll need a CPA or attorney to help you plan your exchange. We can work with CPAs and attorneys across the country, allowing you to pair JTC’s solutions with an attorney or CPA that you’re comfortable with.
4. Do you have 24/7 access to information about your exchange?
As strange as it may sound, some QIs don’t provide investors with information about where their money is being held. You need a QI that cares about transparency, and JTC ensures our clients have access to necessary information and documents at all times through the use of industry-leading technology.
Our award-winning eSTAC technology platform is purpose-built to maximize security, transparency, and compliance throughout the 1031 exchange process. The platform’s robust reporting application records and archives all events and documentation associated with your exchange, providing a full audit trail, and lets you monitor account activity at any time, from anywhere. And if you have any questions, JTC’s dedicated Client Services team can provide help thanks to their extensive experience and knowledge of your specific situation.
5. Does your 1031 Qualified Intermediary have its processes subjected to annual compliance examinations?
To ensure compliance with federal and state tax laws, Qualified Intermediaries should submit to an annual third-party audit of their business practices and technologies. Exceptional QIs should surpass the minimum level of qualification, which is why JTC undergoes regular reviews of its technologies, procedures, and control objectives.
JTC subjects its processes to an SOC 1 Type 2 audit, conducted under the SSAE 18 auditing standard, a recognized compliance and controls standard from the American Institute of Certified Public Accountants Auditing Standards Board that is used by leading banks and service providers in the financial industry. If you want to ensure your funds and data are secure, JTC has third-party verification that its processes are effective. If you’re wondering whether a certain QI is the right fit for your 1031 exchange, ask yourself the five questions above; the answers should tell you all you need to know. While some companies may be able to boast a few of these capabilities, JTC can meet all your 1031 exchange needs. Talk to a JTC representative today to learn how we can help with your unique situation.