Qualities to Look for in a 1031 Exchange Facilitator

A 1031 exchange facilitator is a third-party liaison required to complete an exchange of investment properties with the intention to defer capital gains tax. The exchange facilitator must hold the proceeds from sale of the original investment until the replacement property is identified. Doing your due diligence when selecting an exchange facilitator is important since most states have no licensing requirements to become one. An inexperienced facilitator can compromise the 1031 exchange and you could lose out on your tax deferment, or worse, the proceeds from the sale of the relinquished property. Here are some qualities an investor should look for in a 1031 exchange facilitator.

Experience and Knowledge

The 1031 tax code is frequently updated. It’s important for your exchange facilitator to stay current with the law. In addition, portions of the 1031 tax code is many times left up to interpretation, and your exchange facilitator should have enough experience to help you determine how to move forward with the transaction when the law is unclear. Should an IRS audit arise, your facilitator should know how to structure and document the deal to pass with it with flying colors.

Procedures and Internal Audit Controls

The facilitator should have written policies and procedures detailing how your funds will be safeguarded while in their possession. Starting with the exchange employees, they need to be trustworthy and the facilitator should have a policy that includes background screening of each one. The facilitators audit controls should typically require two or more employees to initiate any disbursement of funds, accessing checks, processing checks and sending wire transfers. There should be multiple parties reviewing and approving the daily balancing and reconcilement of bank accounts where the funds are held.

Association Membership and Insurance

Since there are no federal regulations governing exchange facilitators, it’s important they are held to a high standard. The Federation of Exchange Facilitators (FEA) is the national association that provides education, trainings, and keeps members fresh on 1031 exchange laws. Since your facilitator will be holding a substantial amount of money on your behalf, it may keep your mind at ease knowing that they are apart of an association and being held accountable for their actions. Also, the exchange facilitator should have fidelity bond coverage to protect against potential employee theft and errors and omissions insurance in the case of human error.

Estimate for Services

An estimate for services should be provided in advance. Depending on how complex your case will be, your facilitator will structure your exchange. There are a variety of ways a facilitator can take compensation. You will need to know if they charge a fee upfront or retain the interest earned on the funds while in their possession.

Questions to Ask an Exchange Facilitator

An investor should take care to thoroughly investigate and interview each potential facilitator before making their selection. When evaluating an exchange facilitator here are a few questions to consider.

  • How many years have they performed services as an exchange facilitator and is there a tax professional or certified exchange specialist on their staff?
  • Are funds deposited in a segregated FDIC insured account?
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