USITS as a Qualified Intermediary in §1031 tax deferred property exchanges
US-International Trade Services assures transparency! Each and every client has their own personal escrow account set up for their individual transactions. There is never any co-mingling of funds. You always know where your funds are, how they are handled, and that they are safe in one or more insured escrow accounts.
Your §1031 funds are safe with USITS
USITS can offer other avenues for our clients to invest their capital gains should they not have a new real estate investment ready.
USITS can also arrange a variety of finance options for purchasing real estate investments eligible for §1031 tax deferred exchange treatment.
Our association with a network of qualified CPAs and tax attorneys assures that you will receive current and appropriate advice and counsel concerning your §10331 exchange.
Unlike banks, stockbrokers, and insurance companies, there is no national standard or federal authority that oversees qualified intermediaries. QIs are generally not required to be licensed or even insured.
Qualified intermediaries—also known as accommodators and facilitators—have three primary responsibilities in a 1031 exchange:
- Hold the cash from the sale of relinquished property until you are ready to use it to purchase a replacement property.
- Coordinate the legal documents required for your exchange.
- Ensure your exchange complies with the IRS’ rules.
If your qualified intermediary fails to adequately perform one or all of the responsibilities listed,
- Your money may be stolen
- Your exchange will be disqualified by the IRS, and you will owe taxes and/or;
- You will likely spend considerable resources defending your position in a federal audit.
In 2012 the Federal Trade Commission reported that it was aware of 23 instances where investors lost an estimated $250 million as a result of fraud and negligence by qualified intermediaries.
Equally telling, the IRS provides the following warning 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.”
Accommodators are more than just an expensive escrow agent; they provide very specialized services. Just because a qualified intermediary can legally handle your exchange doesn’t mean they are actually “qualified.”
A QI performs three tasks
- Prepares the legal agreements necessary to properly structure a 1031 exchange.
- Holds and safeguards your money from the sale of a property (i.e., your 1031 proceeds) until you close on a replacement property.
- Ensures that your exchange complies with the Internal Revenue Service’s rules.
The LandAmerica Exchange Services Bankruptcy
The world of qualified intermediaries came under intense scrutiny on the morning of November 26, 2008, when LandAmerica 1031 Exchange Services (LES) filed for bankruptcy protection. At the time, LES was a significant player in the qualified intermediary business. LandAmerica Financial Group, the parent company of LES, was the third largest title insurance company in the country.
When LES filed for bankruptcy, it was serving as the exchange accommodator for 450 individual investors, and holding $420 million of their 1031 exchange funds. Of these, about 400 had signed exchange agreements that did not require a “segregated account,” presumably because they didn’t understand the risks of choosing the lower cost option of putting their funds in one large “commingled account.”
The commingled account option cost less because LES was legally allowed to invest the investors’ funds and keep most of the interest earned. When the financial crisis hit in September 2008, the market value of the securities LES had invested in dropped more than 50%, which made LES insolvent and forced the company to file for bankruptcy.
Check the qualifications of the CPA and tax attorneys relied upon by the QI. Although basic QI services do not include tax advice, good tax counsel can mean the difference between a successful §1031 exchange and a costly failure.
Your funds should be held in a Segregated Qualified Trust Account or a Segregated Qualified Escrow Account. Avoid the low cost option of a commingled account and QIs that promise to pay a high interest rate.
Your §1031 funds should be kept in a large, reputable FDIC insured bank, but you must remember that FDIC insurance is generally limited to $250,000 per account holder.
A QI is a fiduciary!
Internal controls are the policies and procedures that protect your funds against theft or fraud by the QI. Best practices are to require your signature, followed by written approvals within the QI organization.
A QI should maintain insurance to protect against theft of your money and if the IRS says you have to pay taxes as a result of the firm’s negligence. At a minimum, your account should be protected by fidelity bond coverage and Errors & Omissions insurance.
The Exchange Agreement is the contract between you and the QI that governs the relationship.
Read your Exchange Agreement with the Qualified Intermediary