Magazine article Journal of Property Management

Qualifying the QI

Magazine article Journal of Property Management

Qualifying the QI

Article excerpt

Be cautious when selecting a Qualified Intermediary

Qualified administer thousands of 1031 exchange transactions and account for millions of dollars every year. With the exception of Nevada, they are not licensed, regulated or required to be bonded or insured. The result is hundreds of unsuspecting investors have lost millions of dollars due to theft, embezzlement and a variety of other causes.

Although the most common problems may be due to honest errors or innocent mistakes, there are a wide range of things that can go wrong during a 1031 exchange. Therefore, real estate managers may be wise to lend a few words of caution and provide recommendations to a client considering a tax-deferred exchange.

The Qualified Intermediary (QI) must have the technical knowledge to identify potential problems, meet regulatory requirements, provide proper advice and guidance, and most importantly, safeguard the exchange funds during the transaction. A QI who has obtained the Certified Exchange Specialist designation granted through the Federation of Exchange Accommodators will assure a certain level of knowledge and experience.

Even with this designation, however, your client should make sure the QI has extensive experience in the type of 1031 exchange your client is contemplating. The level of experience and expertise of the QI also becomes increasingly important when transactions become more complicated. Even a seasoned QI may flounder with complex exchanges or reverse exchanges involving multiple properties being relinquished by multiple investors and/or multiple replacement properties. Because even the most careful evaluation of a QI will not prevent mistakes from happening, the QI should also have Errors and Omissions (E&O) insurance in adequate amounts to protect your client.

In addition to E&O insurance, clients should inquire about the QI's fidelity bond coverage. …

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