How to choose a qualified intermediary (QI) for a New Jersey 1031 exchange

A deferred exchange is not a swap. You sell to one buyer and buy from a different seller, and the two closings can be months apart. The intermediary is what keeps that sequence from being a taxable sale followed by a purchase.

Under regulation 1.1031(k)-1(g)(4), a qualified intermediary is a person who is not the taxpayer and not a disqualified person, who enters into a written agreement with the taxpayer to acquire the relinquished property and transfer the replacement property. Meeting that safe harbour means you are not treated as having actually or constructively received the proceeds.

The practical consequence is strict. Proceeds go from the closing directly to the intermediary. If they land in your account for even a day, the safe harbour is gone and no amount of paperwork afterwards repairs it.

This is where most of the confusion sits, and the regulation is unusually specific about it.

A disqualified person includes your agent at the time of the transaction. For that purpose, anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date you transfer the first of the relinquished properties is treated as your agent.

Then come the two exceptions that make the system work. Services performed for you on exchanges intended to qualify under section 1031 are not counted. Neither are routine financial, title insurance, escrow or trust services performed by a financial institution, title insurance company or escrow company.

So the title company that handled your last three closings can serve. The accountant who prepared your return last year cannot. People related to you, and people related to your disqualified advisers, are also caught, using the section 267(b) and 707(b) relationships with the threshold lowered to 10 percent.

The quoted fee is usually the smaller number.

That last row is the one to read carefully. On a substantial exchange, several months of interest on the proceeds can exceed the entire quoted fee. Some agreements pay it to you, some share it, some keep it. None of that is hidden. It is in the agreement, and almost nobody reads it before signing.

The federal requirement is thin, so the diligence is yours. A short list covers most of the risk.

• Where will my money sit? Ask for a segregated qualified escrow or qualified trust account in your name, not a pooled operating account.
• What bonding and insurance do you carry? A fidelity bond and errors and omissions cover, with the amounts in writing.
• Do withdrawals require my signature? Dual authorisation is the control that matters most.
• Who keeps the interest? Get the answer before signing, not from the closing statement afterwards.
• Have you handled New Jersey closings? A GIT/REP form has to be filed at the recording desk, and an intermediary who has not seen one before will not raise it.
• Who answers on day 44? Identification deadlines do not move for staffing.

It is not a theoretical risk. Intermediaries have collapsed while holding client funds, and the exchangers lost both the money and the exchange, because the deadlines kept running while the funds were frozen.

There is no federal deposit insurance behind a qualified intermediary and no federal regulator standing behind the arrangement. The protection you get is the protection you negotiated: segregation, bonding, dual authorisation and a counterparty with a long operating history.

Simon Klein & Co. is not a qualified intermediary, does not hold exchange funds and does not act as an exchange accommodation titleholder. The regulation would disqualify us from doing so for our own clients, and that separation is a feature.

What the firm does is the tax side. Whether an exchange beats paying the gain, modelling the boot before you identify, checking that the replacement value and debt actually achieve full deferral, coordinating with the intermediary and the closing agent, filing Form 8824 with the return, and handling the New Jersey GIT/REP form and the basis that carries over.

The intermediary handles the money and the documents. The CPA decides whether the numbers work. Getting both in place before the relinquished property closes is what makes the difference. What happens at the New Jersey closing table is covered on 1031 exchanges in New Jersey.