Question 1

How does a QI facilitate a 1031 exchange transaction?

Accepted Answer

Transaction flow: (1) the taxpayer and QI execute an exchange agreement, (2) the taxpayer sells the relinquished property (the QI is assigned the seller’s rights under the purchase contract; the proceeds go directly to the QI), (3) the QI holds the proceeds (in a segregated, FDIC-insured account), (4) the taxpayer identifies replacement properties (within 45 days; written notice to the QI), (5) the QI acquires the replacement property (assigned the buyer’s rights under the purchase contract; the QI uses the exchange funds to close), and (6) the QI transfers the replacement property to the taxpayer.

Question 2

What are the risks of using a QI?

Accepted Answer

Risks: QI insolvency (if the QI goes bankrupt, the exchange funds may be lost; the taxpayer is an unsecured creditor), commingling (if the QI commingles exchange funds with operating funds, the funds may be at risk), and fraud (unscrupulous QIs have stolen exchange funds). Protections: use a QI with fidelity bonding and E&O insurance, require segregated accounts (not commingled), verify the QI’s financial stability, and use a QI recommended by a trusted attorney or CPA.

Question 3

Can a Florida attorney serve as a QI?

Accepted Answer

Attorney as QI: generally NO. The IRS "disqualified person" rules (Treasury Regulation 1.1031(k)-1(k)) prohibit: the taxpayer’s attorney, accountant, real estate agent, or employee from serving as the QI (if the person has acted in those capacities within the 2 years prior to the exchange). Exception: a person whose only relationship with the taxpayer is providing 1031 exchange services is not disqualified. Best practice: use an independent, professional QI who has no other relationship with the taxpayer.

Qualified Intermediary: in 1031 Exchanges

QI-Facilitated 1031 Exchange

Transaction Flow

Risks

Disqualified Persons

Related Terms

Barnes Walker Real Estate

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