Choosing a Qualified Intermediary

Participating in an IRS Section 1031 tax deferred exchange can be a difficult and confusing process. Taxpayers will not only find themselves faced with the monumental task of understanding and attempting to comply with IRS Regulations, but will also face the task of choosing-from among thousands-a Qualified Intermediary which is experienced and sufficiently well-equipped to assist them in their exchange transaction.

All qualified intermediaries differ in their experience, capabilities and fees and in their financial and professional integrity. Unfortunately, flashy web sites and glossy brochures can hide inexperienced or ill-equipped firms.

Most taxpayers are forced to look in the yellow pages or search the Internet for firms, which provide intermediary services. Unfortunately, this method will yield thousands of results. Alternatively, some taxpayers receive recommendations from real estate agents, accountants and/or other advisors. The real dilemma therefore is what criteria to use in choosing an intermediary from a list of recommendations provided by a third party or how to choose from results yielded in a yellow pages or internet search.

Determining an intermediary's experience in the industry should be a crucial factor in one's selection. Experience should be determined by the firm's length of time in business, the volume of transactions handled, and the professional and educational background and experience of the individuals employed by the firm.

Though tax deferred exchanges have been around since 1920s, the Qualified Intermediary industry did not exist until the adoption of the Treasury regulations in 1991. As such, very few people, and fewer firms, have been assisting taxpayers in this arena before that time. Nonetheless, larger, more established firms have been participating in exchanges for at least five years and sometimes longer. Thus, careful inquiry should be made regarding how long the intermediary has been participating in exchanges.

Additionally, taxpayers should inquire about the number of exchanges an intermediary has handled. More established firms have handled tens of thousands of transactions.

Equally important as experience is an intermediary's financial strength and integrity. Some firms are comparatively small with little or no financial backing. The instances are rare, but misappropriation of funds does occur. Moreover, a firm may go out of business during a transaction. Thus, financial stability is crucial. Firms with affiliations to larger corporations may be able to offer assurances of financial security, which sole proprietorships and other smaller firms may not. And, because those firms are part of large, publicly traded companies, it is therefore easy to ascertain the financial stability of the parent company. Additionally, it is less conceivable that a larger, financially established firm, with a long record of accomplishments will go out of business.

It is also important to know what services the intermediary provides and what the fees for those services will be. A firm that charges a "rock bottom" fee and provides only banking related services could put an unwary taxpayer in the position of having to pay hidden fees or risk not having complete documentation for the exchange. The taxpayer should make sure that the intermediary's fees cover all of the document preparation necessary for the exchange along with banking and any other services required in conjunction with the exchange.

Taxpayers should also consider whether the intermediary is a member of the Federation of Exchange Accommodators- a national trade organization for exchange intermediaries. The FEA is the only national organization of exchange intermediaries; it provides and promotes ethical standards of conduct, as well as educational programs to members and the public. Since no states-other than Nevada-require licensure for exchange intermediaries, membership in the FEA is another way to research and assess the background of an intermediary. Inquiry regarding the status of a firm or individual's membership is possible on the Internet at www.1031.org or by calling FEA headquarters at 916-388-1031. Finally, ascertain whether the intermediary participates in public education programs. Often, participation in such educational programs is indicative of the intermediary's experience and qualifications. Alternatively, lack of experience in this arena may be a sign that the intermediary is not well versed and/or may lack the qualifications and/or experience crucial to many exchange transactions.

As with any other investment decision, the selection of a qualified intermediary should be a careful and thoughtful process. And, while neither the most intricate web site nor the glossiest brochure is a guarantee of experience or success, careful consideration of the criteria discussed herein can assist the unwary taxpayer in making that decision.