Choosing based on price

While fees are relevant to choosing a qualified intermediary, they should not be the determining factor. Like-kind exchanges are highly technical legal transactions, requiring the assistance of skilled and experienced professionals. Just as you wouldn't hire a heart surgeon based on fee, you shouldn't hire your qualified intermediary (QI) based on fee.

Location

Choosing your QI is not like buying a quart of milk. Hiring a QI because their office is local, or convenient to your attorney's office is also not the way to select your QI. IRC §1031 like-kind exchanges are based on the Internal Revenue Code, a federal tax law. The vast majority of the rules and case law are also federal in nature, and many exchange transactions involve properties in multiple states and regions. Always be sure that the QI you choose has the resources to remain current with the state and the federal rules.

Ignoring financial stability

Some intermediaries tout that the fidelity bonds are signs of their security. In the event that those QIs suddenly close their doors, those bonds typically require that the claim be made by the failed QI, not by the taxpayer. Moreover, the taxpayer rarely if ever has access to the bonding information. And when the time comes to make a claim, the bonding company starts with a detailed investigation to determine whether to even pay the claim.

Lack of experience

There is currently no federal licensing or registration requirement to become a QI, and only a handful of states impose any regulation on the industry. Some firms have developed their own "certification" programs for their employees. These are not the same as the Certified Exchange Specialist® designation, the only independent, tested designation in the industry, offered through the Federation of Exchange Accommodators. Designees must prove industry experience before being able to take a rigorous test that assesses all aspects of 1031 exchange knowledge.

Blurring the line between qualified and disqualified

Sometimes taxpayers are led astray by ill-informed advisors. The Regulations governing 1031 exchanges clearly articulate who cannot be your QI, including your attorney and certain other professionals. Additionally, some attorneys or accountants refer their 1031 exchanges to a friend or to a business in which they are part owners, creating potential conflicts of interest.
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