A Qualified Intermediary, also known as the “Exchange Facilitator” or “Exchange Accommodator” plays a crucial role in completing your 1031 exchange. Such facilitation is also required by law under Section 1.1031 of the Department of the Treasury Regulations.
A Qualified Intermediary carries the following responsibilities:
Consulting with you and your advisors with regards to your 1031 exchange.
There are many “gray” areas in Section 1031 of the IRS Code and section 1.1031 of the Treasury Regulations. Your Qualified Intermediary must have sufficient experience and expertise to provide correct and relevant guidance to you while you navigate the 1031 exchange arena.
Preparing 1031 exchange agreements and transactional documents
A mistake in legal documentation could result in the rejection of your 1031 exchange by the IRS, depreciation recapture, and capital gain income tax liabilities along with interest and penalties. Your Qualified Intermediary must have the necessary expertise and understanding of your transaction to properly execute your 1031 exchange without defects.
Receiving, holding, and safeguarding your 1031 exchange funds throughout the process
A Qualified Intermediary must hold the funds from the sale of your property while the 1031 exchange process is carried out. A great deal of responsibility and care are required to safeguard the funds in custody.
1031 Exchange Costs
The Qualified Intermediary must ensure they they are compensated for not only the work that they have performed, but also their amount of risk exposure. The following factors should be considered when seeking a Qualified Intermediary.
Set Up and Administrative Fees
Most Qualified Intermediaries charge a set up or administrative fee between $750-$1000 for each 1031 exchange transaction. This includes all administration with regards to the sale of the initial property and the purchase of the replacement property. Additional property fees of $200-$400 may be charged per additional property that is processed in the exchange.
Some non-institutional Qualified Intermediaries might be observed charging fees of $400-$600, which may appear to be less expensive than institutional Qualified Intermediaries, however all additional costs and charges need to be analyzed and compared to accurately determine the cost of engaging the services of a non-institutional Qualified Intermediary.
Interest Income from 1031 Exchange Funds
About two-thirds of a Qualified Intermediary’s revenue comes from interest earned from the 1031 exchange funds they are responsible for safeguarding. The Qualified Intermediary might retain all of the interest earned, or a portion of it.
Other Fees
Some Qualified Intermediaries may charge other various fees including wire transfer fees, delivery fees, etc…
Choosing the Right Qualified Intermediary.
Some individuals are prohibited from acting as your Qualified Intermediary including yourself, your real estate broker, securities broker, attorney, or accountant. Others may also be disqualified to server as your Qualified Intermediary under Section 267(b) and 707(b) of the IRS Code. Furthermore, while a particular individual may act as your Qualified Intermediary, their death, divorce, or bankruptcy may compromise your 1031 exchange and put your 1031 exchange funds at risk.
Choose a professional and experienced Qualified Intermediary to help facilitate your 1031 exchange.
