Best 1031 Exchange Companies (Qualified Intermediaries) Compared

The decision: there is no best company, only the firm whose account structure you can verify before closing

The federal rule is thin by design. Reg. section 1.1031(k)-1(g)(4)(iii) defines a qualified intermediary as a person who is not the taxpayer or a disqualified person and who, under a written exchange agreement, acquires the relinquished property from you, transfers it to the buyer, acquires the replacement property and transfers it to you. Nothing in it sets capital, bonding, licensing or examination standards, which is why whether intermediaries are regulated has a state-by-state answer.

A ranking of exchange companies cannot tell you what you need to know, which is where your money will sit between closings and who must sign before it moves. The statutes in Washington, Virginia and Maine turn that into a checklist with numbers, and the checklist works in every state because you can write its terms into any exchange agreement. The criteria below are the checklist; the categories are the kinds of firms that will answer it differently.

Two things are outside this page. The disqualified-person test that bars your own attorney, accountant or agent from serving is on how to choose a safe qualified intermediary, and what happens if a facilitator fails is on when a qualified intermediary goes bankrupt.

The four categories of intermediary, and what each one tends to do with the criteria

The categories are not a ranking; a firm in any of them can pass or fail the checklist. They are the ownership structures that decide whose balance sheet, whose insurer and whose conflicts stand behind the account.

• Bank and title-insurer affiliates: the parent is itself regulated and the account is usually at the parent bank; ask whether your funds are a deposit in your name or a liability of the exchange subsidiary, because the regulation's bank exception in paragraph (k)(4)(ii) concerns disqualification, not safety of funds.
• Independent national facilitators: the firm's own bond, insurance and escrow arrangements are the whole answer, so the Washington and Virginia numbers are the test; ask for the bond declarations page and the errors and omissions certificate, not a brochure sentence.
• Attorney- and CPA-affiliated facilitators: often strong on documents and on improvement and reverse structures; the two-year agency test in paragraph (k)(2) means the firm cannot act if its principals advised you on this sale or in the two years before it.
• Sponsor-, broker- or platform-owned facilitators: convenient when you are buying a DST, and a conflict to be checked, because the party choosing your replacement and the party holding your money are then the same party; see do I need a QI to exchange into a DST.

Criteria one to three: the bond, the insurance and the account titling, with the statutory numbers

RCW 19.310.040 gives a facilitator a choice: a fidelity bond of at least $1,000,000 covering employees and owners, or every dollar of exchange funds in a qualified escrow account or qualified trust at a financial institution where a withdrawal needs both you and the facilitator to authenticate it and the bank sends you statements directly. RCW 19.310.060 adds errors and omissions cover of at least $250,000, or cash, securities or irrevocable letters of credit in that amount, and both must be evidenced to you before you sign.

Virginia takes the account route. Under Va. Code section 55.1-802 exchange funds must sit in a separately identified account under Reg. section 1.468B-6(c)(ii), with withdrawals on your written authorization and the facilitator's written acknowledgment, or in a qualified escrow or trust under Reg. section 1.1031(k)-1(g)(3); section 55.1-803 requires $250,000 of errors and omissions cover or an equivalent deposit, and section 55.1-804 bars commingling with operating accounts and lending to affiliates and provides that exchange funds are not subject to execution or attachment on claims against the facilitator.

Those three criteria answer three different failures: a bond covers theft, insurance covers negligence, and a separately identified account in your name and taxpayer identification number covers the firm's insolvency. A candidate that offers one of the three as though it answered all three has told you where the gap is.

Criteria four to six: the statute the firm operates under, its reverse and improvement capability, and who owns it

Ask which state's exchange-facilitator statute reaches the firm. Washington's applies to property in the state or an office there; Virginia's to facilitators handling Virginia property; and Maine 10 M.R.S. section 1396 requires a license from the state administrator before anyone engages in the exchange facilitator business there, with an initial fee capped at $600 and renewals at $500. Where no statute reaches the firm, you buy the same protections by contract, and a firm unwilling to sign them has answered the question.

Reverse and improvement exchanges need a facilitator that can hold title. Rev. Proc. 2000-37 provides a safe harbor under which property held by an exchange accommodation titleholder in a qualified exchange accommodation arrangement is treated as owned by the titleholder, provided the arrangement is in writing within five business days and the parked property is received within 180 days. A firm that has never formed a titleholder entity will learn on your exchange; the costs are on how much a reverse exchange costs and improvement exchange cost.

Ownership decides whose problems become yours. Washington's section 19.310.030 and Virginia's section 55.1-801 both require notice to affected clients within 10 business days of a change in control, defined as a transfer of more than 50 percent of assets or ownership, and a website posting for at least 90 days. Ask who owns the firm, whether a sale is pending, and whether the firm or an affiliate sells replacement property, which brings you back to the fourth category above.

A worked model: the fee is the smallest number on the page, and the interest clause is often larger than the fee

Hypothetical, round figures: $1,500,000 of proceeds held for 120 days. Firm A quotes a $1,000 exchange fee and keeps the interest earned on your funds; Firm B quotes $1,750 and credits interest to you. At a hypothetical 3% deposit rate, 120 days of interest on $1,500,000 is about $15,000, so Firm B's higher fee leaves you roughly $14,000 better off, before tax on the interest, which is covered on interest on exchange funds.

Now put the safety criteria beside it. If Firm A holds the money in a pooled account in its own name with a $1,000,000 bond, and Firm B holds it in a separately identified account in your name with two-signature release, the $750 fee difference is not the decision and the interest is not either; the account titling is. How much a 1031 exchange costs itemizes the rest of the fee schedule, and who pays the QI fee covers whether it can come out of exchange funds. Run the interest arithmetic on your own proceeds and holding period with your CPA.

Then sequence the two decisions. The intermediary must be in the sale contract before closing, as set out on what the QI needs to open your exchange; the replacement, including any DST, is chosen through a registered broker-dealer or adviser, a role explained on qualified intermediary or DST advisor and on our DST broker page. We coordinate identification with whichever intermediary you choose, as our process describes.