1031 Due Diligence – Questions to ask a QI
Section 1031 of the Tax Code requires that a 1031 Exchange intermediary hold the net sale proceeds from your sale until you purchase your new property. What you might not know is that during the last recession, real estate investors lost significant amounts of money that was being held by 1031 Exchange intermediaries. The funds were invested in high risk investment vehicles or simply stolen by unscrupulous companies. Fast forward to today; 1031 Qualified Intermediaries remain unregulated by the federal government and by most states.
It is critical that investors do their own due diligence when choosing which 1031 company to hire. When it’s time to have monies sent to a closing, no one wants to get the recorded message that, “this line has been disconnected and is no longer in service”. Here are some questions to ask a prospective 1031 Qualified Intermediary:
Questions to Ask the 1031 Intermediary:
- Who owns the 1031 Intermediary? Is it a publicly traded corporation?
- How financially stable are its owners?
- Is there transparency with respect to the financial stability and safeguards of the company?
- What protections are provided – A fidelity bond? A written performance guaranty? Errors and omissions insurance coverage?
- Does the 1031 Intermediary have attorneys and CPAs on staff?
- Does the 1031 Intermediary deposit exchange funds into accounts at large, stable banking institutions?
- Does the 1031 Intermediary offer Qualified Escrow or Qualified Trust options for exchangers to protect against bankruptcy or failure by the Qualified Intermediary or bank?
Questions to Ask Regarding the Bank the 1031 Intermediary will be utilizing to hold your funds:
- What criteria does the 1031 Intermediary use to pick its banks?
- What is the size and stability of the banks used by the 1031 Intermediary?
Questions to Ask Regarding the account structure the 1031 Intermediary is using:
- Does the 1031 Intermediary deposit 1031 funds in segregated accounts under the exchanger’s name and Taxpayer Identification Number or are funds commingled?
- Does the Exchange Agreement state exactly what type of an account structure is being used?
- Does the Exchange Agreement expressly state that funds can only be disbursed with the written consent of the exchanger
- Does the 1031 Intermediary invest 1031 funds? (Never recommended) If so, what is the investment? Is it a segregated investment?
Read more to learn about the security and assurances that IPX1031 provides for your hard earned funds: