Savvy Consumer : Are You Choosing a 1031 Accommodator Best Suited For You!

Written By Diane Schaefer, CES™ and President of Exchange Solutions, Inc., N.Y.

In today’s market customers are becoming savvier with IRC 1031 rules and regulations. Accessibility to 1031 exchange information is abundant through intermediaries, accountants, attorneys, brokers and the Internet. However, the taxpayer should be aware of asking the Intermediary the following questions:

Are the exchange funds held in segregated accounts? Intermediaries can either keep the exchange funds in segregated escrow accounts or co-mingle funds to invest in secure short-term investments. The taxpayer will normally receive a lower interest rate if funds are segregated but might find more security in having their own account. In either case, a reputable intermediary will be bonded and insured or have an additional guarantee in investing the exchange funds.

To whom does interest accrue, the taxpayer, the intermediary or both?  Intermediaries can take the interest or growth factor towards their fee as an administration cost. The qualified intermediary (QI) can take all or partial interest on the exchange proceeds being held from the sale of the relinquished property awaiting the purchase of the replacement property.  Some intermediaries will charge a higher cost for the setup fee and administration but not take any client interest. Either case is acceptable; however, make sure your intermediary discloses this issue in the exchange agreement or initial fee schedule.

Is the intermediary an “accommodating accommodator?” This is an unquestionable procedure to any reputable, ethical intermediary.  There are some accommodators that will tell their clients that the 45-day designation period does not matter. On the contrary, it does matter and it is a part of the code that must be adhered to until such time the code is amended. These dishonest intermediaries not only hurt and discredit the industry, but can also affect taxpayers’ exchanges. If the IRS learned which QIs are practicing unethical procedures, this could taint every exchange completed by that intermediary regardless of whether the taxpayer identified the replacement property timely or not should the service decide to challenge that company. Ethical intermediaries and members of the Federation of Exchange Accommodators (FEA) are encouraged to advise the FEA as to which companies are not keeping to the code and accommodating taxpayers. These qualified intermediaries know who they are and should terminate this practice at once before being reported to the Service. Nationally, word does spread among the industry, and more and more, companies are being reported to the FEA. My question to the taxpayer is, why would you want a dishonest intermediary holding your money? If the QI is corrupt in upholding the integrity of the code, then how safe is your investment?  Seek out a professional company through the FEA and make sure the QI is honest, ethical, recommended and reputable.

Does the QI have a certified exchange specialist (CES) on staff?  Effective 2003, the FEA has instituted a certification program for all tax deferred exchange professionals within the association:

• To establish a national designation program to formally recognize those individuals who have demonstrated, through testing and continuing education, their knowledge of IRC Section 1031 rules and regulations pertaining to like-kind exchanges and their ability to facilitate exchanges for the general public;

• To provide a designation that will give the public confidence that they are dealing with an individual who has demonstrated knowledge in the intricacies of a like-kind exchange and subscribes to a code of ethics;

• To encourage exchange professionals to increase their knowledge of IRC Section 1031 rules and deferred exchange treasury regulations, and to maintain currency in the subject though continuing education.

• To encourage the growth of the FEA by providing a nationally recognized certification program for exchange professionals.

Is your Intermediary qualified to handle your exchange?  The taxpayer should not only seek out a company that has a CES on staff, but should look for an Intermediary that can handle their particular type of exchange.   Intermediaries specialize in reverse, construction/build to suit, personal property, timber, mineral, oil rights, multi-asset exchanges, etc.  Furthermore, a taxpayer’s attorney cannot act as their qualified Intermediary. The accommodating party cannot be a “disqualified person.”  A disqualified person is defined in IRC Section 1.1031(k)-1(k)(2), (k)(3), or (k)(4).  One of the two classifications of a disqualified party is a disqualified person who is the agent of the taxpayer at the time of the transaction.  A person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker, within the two-year period ending on the date of the transfer of the first of the relinquished properties, is treated as an agent of taxpayer at time of the transaction.

What it comes down to is that all of the above questions should be asked by the taxpayer, real estate attorney or real estate agent and explained by the Intermediary prior to the taxpayer entering into an Exchange Agreement.   The customer should be aware of their Accommodator’s procedures, service, ethical background and knowledge.  Taxpayers have numerous choices of escrow companies, holding companies and qualified intermediaries so pick the one that best suits you.  After all, the taxpayer is paying for the Intermediary’s service and should feel comfortable and secure with the company handling their investment.

*The Mission Statement of the FEA Certified Exchange Specialist ™ Program, CES™ Designee Handbook, Page 5; July 11, 2003