The Role of the Qualified Intermediary in a 1031 Tax Deferred Exchange
Most investors agree that utilizing a 1031 tax deferred exchange is definitely one of the best ways to go when interested in obtaining and selling property without the worry of paying large capital gains taxes. However, there are certain costs and transaction fees involved with a 1031 real estate exchange, which will usually depend upon the amount of risk that the Qualified Intermediary is taking, which is considered fair compensation. This is separate from the normal services they provide.
About two thirds of the QI's 1031 exchange revenue comes from income that is generated from the interest. Interest income is what is gained from the interest of the deposits with the Qualified Intermediaries; they can hold the interest gained on your deferred 1031 exchange funds while the funds are deposited with them. They may choose to share some or a full portion of the income generated from the interest as well.
Using a fee structure is a clear and fair way to pay for the services rendered by your Qualified Intermediary. This structure should be evaluated, negotiated and understood clearly by everyone involved in the 1031 tax deferred exchange. The size of the exchange transaction does have a direct affect on the amount of risk involved, as the QI is exposed equally to the gains in interest income that is held by them.
Some QI's have the ability to make their fee schedule look less expensive than the competition, so consider all of the facts involved in a 1031 like kind exchange and compare each proposal to make an informed decision.
In order to make an informed choice for a QI, be sure to consider all of the facts and risks involved and make QI comparisons carefully before making your decision. Don't forget that the size of the 1031 like kind exchange will have a direct effect on the level of risk that they are exposed to as it concerns the interest income from the deposits they keep.
