How do I choose a safe qualified intermediary?

Washington makes its facilitators print the uncomfortable sentence themselves

State law there requires a conspicuous disclosure on the facilitator's website and in its contract, and the last two sentences are the ones to read twice: 'Exchange facilitation services are not regulated by any agency of the state of Washington or of the United States government. It is your responsibility to determine that your exchange funds will be held in a safe manner.'

That is the accurate starting point everywhere. A company can call itself a qualified intermediary the day it incorporates, because the federal definition in Reg. §1.1031(k)-1(g)(4)(iii) sets no capital, bonding, licensing or examination standard at all.

So the question is not whether the firm is licensed. It is what happens to your money on the afternoon of your closing, and who has to sign before it moves again.

Three state statutes hand you a specification with numbers in it

Washington, California and Virginia each legislated after the failures of the late 2000s, and their requirements converge closely enough to use as a private standard no matter where your property sits.

Ask for evidence of each item in writing. Washington and Virginia both entitle a current or prospective client to demand proof that the statute's requirements are satisfied.

• Washington, RCW 19.310.040: either a fidelity bond of at least $1,000,000 covering employees and owners, or every dollar in a qualified escrow or qualified trust where a withdrawal needs you and the facilitator to independently authenticate the transaction and the bank sends you statements directly
• Washington, RCW 19.310.060: errors and omissions cover of at least $250,000, or cash, securities or irrevocable letters of credit in that amount
• California, Financial Code division 20.5: a fidelity bond or deposit of $1,000,000, or a qualified escrow or qualified trust requiring written authorization from both sides, plus $250,000 of errors and omissions cover
• Virginia, § 55.1-802: exchange funds in a separately identified account under Treas. Reg. §1.468B-6(c)(ii), with every withdrawal requiring your written authorization and the facilitator's written acknowledgment
• Virginia, § 55.1-804: no commingling with operating accounts, and no lending or transferring exchange funds to affiliated or related entities

The sentence worth more than any brochure: funds not subject to execution or attachment

Both Washington and Virginia end their accounting sections with the same protection. RCW 19.310.080(2) states that 'exchange funds are not subject to execution or attachment on any claim against the exchange facilitator,' and Va. Code § 55.1-804(C) says the same in the same words.

That is the difference between being a client and being a creditor. Ask your candidate, in writing, which state's exchange-facilitator statute it operates under, whether the account is opened in your name and taxpayer identification number, and whether it will send you the bank's own confirmation of the deposit.

Where no statute applies, you can buy the same result contractually by insisting on a qualified escrow or qualified trust under Reg. §1.1031(k)-1(g)(3) with a third-party depository, rather than a pooled account in the facilitator's name.

What the prudent investor standard forbids, spelled out as four tests

Washington does not leave 'safely invested' to the imagination. RCW 19.310.080(1) requires the facilitator to hold funds in a way that provides liquidity and preserves principal and earned interest, and then lists what breaks that standard.

Read your exchange agreement against this list, because a facilitator whose contract permits any of it has told you where the risk lies.

• Knowingly commingling exchange funds with the facilitator's operating accounts, except that its own fee may pass through the same account if promptly withdrawn
• Lending or transferring exchange funds to any person or entity affiliated with or related to the facilitator, other than a financial institution or an accommodation titleholder under the exchange contract
• Investing in anything that does not provide enough liquidity to meet the facilitator's obligations to its clients
• Investing in a way that fails to preserve principal, unless the loss is beyond prediction or control or you specifically requested that investment

Nine questions the Federation of Exchange Accommodators tells you to ask

The FEA publishes a short due-diligence list for taxpayers, and it is worth sending as an email rather than asking on a call, so the answers are in writing.

• How many exchange transactions has the firm facilitated in the last two years, and in which asset types does it specialize?
• Are client funds segregated from operating funds, in accounts identified by the client's name and taxpayer identification number?
• How many signatures are required to release the funds, and whose signatures are they?
• Are background checks performed on employees?
• What is the amount of the errors and omissions policy, and what is the amount of the fidelity bond or crime insurance?
• What steps protect against cybercrime and outside criminal activity?
• Is a Certified Exchange Specialist, attorney or accountant on staff?
• What turnaround times apply to document preparation and the release of funds?
• Is the quoted fee inclusive, and is interest earned on the funds while they are held?

Two disqualifiers to clear before you ever discuss price

First, run the independence test. Anyone who has acted as your attorney, accountant, real estate agent or broker within the two years ending on your closing date is a disqualified person and cannot serve; can my attorney, CPA or agent be my qualified intermediary works through the exceptions.

Second, ask about ownership changes. Virginia requires a facilitator to notify affected clients of a change in control within 10 business days and to post the notice on its website for at least 90 days, which tells you the question is a real one even where no statute compels an answer.

Only then compare fees, and treat a saving of a few hundred dollars against six or seven figures of proceeds as what it is; how much does a 1031 exchange cost sets out the line items. Have your CPA or attorney read the exchange agreement before you sign, because the controls you are buying live in that document.