The IRS statute requires that you use a qualified intermediary (QI) to perform your 1031 exchange. While it is possible for an attorney to provide this service, it doesn’t have to be an attorney and it can’t be an attorney you have utilized for any other matters. This is because the IRS statute also requires that the QI be an unrelated third party. This means that the attorney you typically do business with can’t also be your QI.
Successful investors typically select an experienced national QI. While this can be an attorney who exclusively handles exchanges for you, the law degree shouldn’t be the deciding factor in your QI selection. This is because 1031 exchanges are generally a small part of a client’s legal needs. Most attorneys do not specialize in that part of the tax code and will only do them occasionally. Lack of familiarity with the mass amount of case law and frequently evolving requirements can jeopardize the success of your exchange.
SELECTING YOUR 1031 EXCHANGE QUALIFIED INTERMEDIARY
When selecting a QI, focus on finding a company with national coverage and the reputation and experience to:
- Secure your exchange funds in a way that protects you
- Prepare quality, time tested exchange documents that meet all IRS standards (some QIs offer a guarantee)
- Respond to inquiries in a timely and thorough manner
For a more detailed discussion, see the article Choosing Your Qualified Intermediary.
Once you have identified QIs that meets the above criteria, then consider their cost. The range of prices for quality QIs can vary. Saving (or spending) an extra couple hundred dollars can be the difference between a smooth or troublesome transaction. If you are wondering if the QI you are considering is charging too much, check out our Bigger Pocket’s blog post on 1031 Exchange Costs.
Attorneys who only occasionally handle 1031 Exchanges tend to be quite a bit more expensive. At the opposite end of the spectrum are attorneys who “specialize” in 1031 Exchanges but have devolved to bargain basement QIs offering little or no real time support. I recommend concentrating your efforts on finding an unrelated QI – attorney or otherwise – who will 1) ensure the safety of your funds, 2) guarantee the quality of your exchange documents, and 3) be responsive to your inquiries all at a price that lets you sleep at night.