Why Choosing an Experienced Qualified Intermediary Can Help Protect You from Wire Fraud

It’s no secret that wire transfers have become more sensitive with rapidly developing fraud and cybercrime tactics. This means that you must be more informed and vigilant than ever when dealing with heftier wire transfers, like a 1031 exchange.

The well-known like-kind 1031 exchange allows individuals who sell commercial property to delay paying capital gains tax if they buy or invest in another similar property of equal or greater value within a certain time frame.

When filing the exchange, the IRS requires a qualified intermediary (QI) to hold your profit temporarily. And while this QI can be just about anyone, choosing an expert can protect you against fraud, saving you hassle and potentially thousands of dollars in profit.

How Can Fraud Happen in a 1031 Exchange?

The potential for fraud comes into play when choosing the QI who will hold your money in escrow. While the QI is often seen as a required neutral party to complete a 1031 exchange, the IRS doesn’t actually regulate who can be a QI.

There is no mandated state, federal or national standard or authority that oversees QIs, and only a small number of states require them to be licensed or insured. 

This lack of regulation and the short, tight deadlines in 1031 exchanges can mean that unqualified QIs can get away with hiding referral fees or commissions in their consulting agreements or contracts. What’s even more disconcerting is that the lack of structure around these roles means there are no federal regulations governing fees. 

Choosing an experienced, ethical QI can help you avoid these potential pitfalls. 

How Can My QI Protect My Profit?

The three main responsibilities of the QI during a 1031 exchange are:

1. Hold the money from the sale of your original, to-be-sold/sold property until you have found a new property to invest in.
2. Organize and prepare the legal documents for your 1031 exchange.
3. Follow the IRS’ rules for 1031 exchanges.

If the QI you choose is unreliable and does not take these responsibilities seriously, you could be vulnerable to fraud. Your money could be stolen, your 1031 exchange could be deemed ineligible by the IRS, and you might even have to spend a considerable amount of time, resources, and/or money cleaning up the mess left behind. 

Why Is a Good QI So Important?

If that’s not enough to make you think twice about who to appoint as your QI, take a look at the warning shared by the IRS on their website:

“Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year, while any losses the taxpayer suffered would be considered under separate code sections.”

Just like you wouldn’t try to fix certain household appliances, diagnose certain medical issues, or complete certain financial tasks yourself, it’s important to find a QI specifically qualified to complete expert and efficient 1031 exchanges.

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Don’t get caught up in the complexities of a 1031 exchange. National 1031 is your expert in guiding you through a 1031 exchange and serving as your Qualified Intermediary. We also enlist the help of CertifID to protect all 1031 exchange transactions from wire fraud. Contact us at national1031.com/contact.

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