A 1031 exchange provides powerful tax-deferral benefits, but the safety of your equity capital ("1031 exchange funds") depends entirely on the qualified intermediary (QI), often referred to as accommodator or facilitator, that you choose to administer your tax-deferred exchange.
The 1031 QI industry operates without any kind of federal licensing or regulatory oversight. A mistake or lapse in security by an unregulated intermediary can lead to a disqualified exchange or the complete loss of your funds. To safeguard your investments, you must demand strict financial protections.
When selecting a QI, always verify these critical criteria:
- Licensing and regulatory oversight: Ensure the 1031 firm is licensed and regulated by a government agency, and is subject to regulatory exams, minimum bonding, insurance and equity capital requirements.
- Independent audits: Ensure the 1031 QI is subject to annual exams by their regulator, and independent audits by an outside, independent certified public accounting firm.
- Robust insurance: Verify the qualified intermediary has substantial bonding and insurance coverage through fidelity bonds, errors and omissions insurance, and cyber fraud and wire transfer fraud insurance coverage.
- Minimum Equity Capital: Determine if the 1031 QI must maintain minimum regulatory required equity capital reserves to better protect its clientele.
- Fund security: Require separate, segregated, dual-signature, restricted qualified trust or escrow accounts to prevent commingling of funds.
Trust, but verify. Protect your principal above all else by partnering with a best practices qualified intermediary that prioritizes financial security, safety and security of 1031 funds, and deep technical expertise.
Read our comprehensive article to learn exactly how to evaluate and select the safest, most secure qualified intermediary for your next transaction.
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