🚨 1031 Exchange QI Selection: Protecting Your Exchange Proceeds

[Bruce D. Kowal]

Lots of question, all the time, about finding a QI for your §1031 exchange.  It  can't be stressed enough how crucial your Qualified Intermediary (QI) selection is in a §1031 exchange. Let's talk about protecting your hard-earned equity.

The most critical aspect of QI selection is SECURITY OF FUNDS 🔒

Here's why:

Your QI holds your exchange proceeds during the exchange period

These funds are NOT protected by FDIC insurance

QIs are largely unregulated in most states

If your QI goes bankrupt, you could lose everything

Key Protection Steps:

Verify FIDELITY BONDING 🏦

Ask for proof of current fidelity bond coverage

Confirm the coverage amount exceeds your exchange proceeds

Request verification directly from the bonding company

Check FINANCIAL CONTROLS ⚖️

Segregated accounts for each exchanger

Dual controls on fund movements

Written procedures for fund handling

Treasury Regulations §1.1031(k)-1(g)(4) outlines QI requirements but doesn't mandate specific security measures. This is why YOUR due diligence is essential.

RED FLAGS 🚩

QI offers to pay high interest rates on exchange funds

Pressure to sign documents without review

Reluctance to provide banking/security documentation

No physical office location

Limited staff availability

PRO TIP: The Federation of Exchange Accommodators (FEA) maintains membership requirements including bonding and insurance. While membership doesn't guarantee safety, it's a good starting point.

COST VS. SECURITY TRADE-OFF 💰

Don't choose a QI based solely on fees. Lower fees might mean:

Reduced security measures

Commingled accounts

Limited insurance coverage

Understaffed operations

Remember: Your entire gain deferral under §1031 depends on proper execution. A QI failure could trigger immediate recognition of all gain, plus potential penalties and interest.

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