Protect your 1031 exchange money: Exercise caution when selecting a qualified intermediary

Most real estate investors take advantage of 1031 exchanges. While investors are familiar with the basics of a 1031 exchange, often little attention is paid to selecting the 1031 exchange qualified intermediaries (QI) who holds their money. Unfortunately, 2007 saw many QIs take advantage of unsuspecting real estate investors-several hundred million dollars were lost... There are literally hundreds of QIs. While the majority are honest and competent, it is best to exercise caution in your selection of a QI. No matter how large or small your transaction is, you need to do your homework. 1031tax.com believes that you should use a bank owned QI to hold your funds. Here are the reasons: Regulation Many real estate owners have been surprised to learn that there is no licensing or registration requirement for a firm to become a QI. When choosing a bank to be a QI, you will find that they have extensive internal audit procedures and as a federally chartered bank, the QI subsidiary is subject to regulatory oversight of its practices as a banking firm. These bank owned QI subs are regularly audited to ensure compliance with corporate policies and procedures as well as laws and regulations. Deposits With word of problems and bankruptcies at several privately-held QIs, real estate owners should ask about how their funds are held. With a bank owned QI sub, exchange funds are typically held in segregated deposit accounts (qualified trusts) that are obligations of the bank. Accounts should be established using the client's tax identification number. Fund movement procedures should be initiated by the client and then authorized by the QI. The QI should have a call-back policy to verify instructions. The documentation should be thorough and require that the client provide information on the individuals who are authorized to move funds. No funds should be moved without the client's authorization. You will find that most major banks are monitored by regulators, investors, and rating companies such as Moody's and Standard & Poors. Insurance Your QI should carry bonding as well as errors and omissions insurance. Additionally, your QI should have the following insurance coverages: financial institution bond, computer crime, mail and transit, worldwide property, U.S. terrorism (TRIA), directors and officers liability, bankers professional liability. Contingency Planning Your QI should also have a disaster recovery planning and well-planned operating procedures in case any problems or disruption occur at its offices. For example, your QI should maintain remote locations where employees may work in the event their normal office is not available. The QI's computer servers should be located in separate buildings and should be backed up daily. Experience and Expertise While a QI may not provide tax or legal advice, it is important to turn to a provider that is highly experienced and has deep knowledge of Internal Revenue Code Section 1031. The QI staff should be up-to-date on industry practices and governing regulations. The QI staff should attend major 1031 conferences to hear about the latest practices in the 1031 exchange field. Alan Fruitman is president and managing broker at 1031tax.com, New York, N.Y.