When selling real estate or expensive equipment, your Certified Public Accountant (CPA) or attorney might recommend engaging a qualified intermediary (QI) to accommodate a 1031 tax deferred exchange to maximize your tax benefits. The 1031 exchange allows owners of apartments, single-family rentals, office buildings and equipment to defer the federal and state capital gains and recaptured depreciation taxes. There are multiple players in the 1031 exchange market place that could serve as QIs, and they could be grouped into two major categories of “institutional” and “non-institutional” QIs. So, what is the difference between the two? Should this classification impact your decision-making process when selecting a QI?
QI’s Responsibilities
QIs have two responsibilities. First, they are responsible for providing IRS compliant 1031 exchange documentation that supports the taxpayer’s intent to initiate a 1031 exchange. Secondarily, QIs hold the net proceeds from the sale in an escrow account on behalf of the taxpayer.
Institutional Vs. Non-Institutional QI
The 1031 QI market space is composed of institutional and non-institutional providers of 1031 exchanges. The institutional QIs are typically subsidiaries of banks or title insurance companies. They maintain as a part of their business model large fidelity and error and omissions policies.
Non-institutional QIs are independent companies that can be local or operate nationwide given they satisfy those state requirements currently legislated by Washington, Oregon, California, Idaho, Nevada, Colorado, Virginia and Maine. Other states such as Maryland, New York, New Jersey and South Carolina require the filing of tax exemption requests from the taxpayer or QI.
The institutional QI is part of a larger company while the non-institutional QI is not. There are independent QIs that have more employees than others including regional representation. The prepared exchange documents of both institutional and non-institutional accomplish the task of deferring recognized gain. The funds are held following “good funds procedures” in segregated accounts or qualified escrow accounts under the taxpayer’s tax identification number. Interest is earned either to the benefit of the taxpayer or QI or both. In house procedures are followed to mitigate QI mistakes. Both institutional and non-institutional are professionals, lawyers, CPAs, bankers, title officers and Certified Exchange Specialists®.
Each QI is as good as their exchange documents and staff that consults with taxpayers. Some QIs will charge higher QI fees, retain more or less interest than others. Expertise is the ultimate differentiator leading to trust and responsibility to be an expert of the exchanges facilitated.
Interested in what questions experienced investors ask when interviewing QIs?
What is your experience with institutional vs. non-institutional QIs?
We Can Help
Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.
Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.
