Up until 1990, when the IRS finally issued the long needed definitive guidelines, exchanging real estate was confusing and many times fatal. Thousands of deferred exchanges were disallowed when challenged by the IRS. The new regulation—1.1031(k)-1—changed all that. For the first time we had a bulletproof plan to follow in structuring "IRS safe" deferred real estate exchanges.

The biggest, most important change was the creation by IRS of the Qualified Intermediary function necessary to make deferred exchanges work within the restrictions and definitions of the Internal Revenue Code. That’s why the role of the Qualified Intermediary has become crucial to successful deferred §1031 exchanges.

The importance of this central position cannot be over emphasized—it is vital. An inexperienced or incompetent Qualified Intermediary can sink your exchange faster than the Titanic went down. You must choose a Qualified Intermediary who gives you fast, accurate and reliable service with an up front schedule of fees charged.

To help you choose your Qualified Intermediary, here are some guidelines and a checklist to help you make the right choice.

Track Record – How long has the company been in the qualified intermediary business? If they are in their tenth year or more, they have been there from the start. That’s good. You should insist they have the ability to exchange properties anywhere in the United States and the U.S. Virgin Islands. And national experience in making these exchanges is a must.

Real Estate Background – Exchanging is a series of real estate transactions subject to strict time limits and other requirements. Some transactions can get very sticky and mess you up. When this happens, you need the experience and know-how of a QI with a solid background in real estate brokerage to help guide and problem-solve you through. If your exchange gets in trouble, you want—no, you need—a QI who can jump in and help you. Not some inexperienced QI who has not been there and done that. You need a lot more than a QI with only financing or title business experience.

One easy way to check on real estate experience: Find out if the owners hold professional designations earned by study and experience through national real estate organizations. Examples are Accredited Land Consultant (ALC) awarded by the Realtors Land Institute, Graduate, Realtors Institute (GRI), and Certified Residential Specialist (CRS), awarded by the National Association of Realtors. It takes a lot of time and experience to earn these and other designations—the kind of experience you need in your QI.

Big Company Name Dropping - Don’t be fooled by big name companies setting up a line-extension Qualified Intermediary business. Many times the parent company assigns a staff member to run the intermediary business who has no background or experience in the factual world of real estate exchanging or brokerage. One large title company I know owns a Qualified Intermediary company to increase their title business. The QI consists of a desk in the title companies main office manned by one sales rep for the QI business. He’s out in the field most of the time so one of the title clerks with no background in exchanging answers the phone. When the sales rep is off sick or on vacation, you can just wait. The claim they are "backed" by a large title company is meaningless to me; I would prefer to do my business elsewhere, thank you very much.

Support and Help – How much support can you get when you need it? Can you deal directly with the Qualified Intermediary company owners, not hired staff, clerks, or branch offices? This assures you of quick, on the spot reliable answers when you need them. I learned of a case where a client called the local office of a large Qualified Intermediary company to set up an exchange transaction. It took almost a month to get all the details worked out to get the transaction in motion. Then one day, the client needed an answer on one of the issues and called the QI. The person answering the phone was not familiar with the transaction and the client spent considerable time bringing her up to date. The staff person at the QI told the client that the exchange as described could not qualify for §1031 treatment. By now the client is in orbit. It turns out the phone call to his QI was rolled over to another office in another city. So much for high tech.

Security – Insist on a complete up-front disclosure of how your funds are secured. Your sales proceeds can run into hundreds of thousands of dollars—your dollars—and its safety is critical.

Fees – Fees can be a real sticky-wicket. It’s a must to get an honest disclosure of fees up front. No low-balling or hidden charges that pop up at the closing. Beware of QIs who quote a flat fee only to add on all kinds of extra charges at the closing. Insist on a fee schedule in writing before you commit.

References – Be sure to check out the Qualified Intermediary’s bank and attorney references. These two are a must.

A Word for Real Estate Agents – One of the most difficult areas of your real estate practice is the art of recommending other professionals to your clients. For example, you have listed a property for sale by your client seeking a §1031 deferred exchange. As part of this transaction, your client will need the services of other professionals such as qualified intermediaries, title companies, lenders, and the like. In your client counseling session, you should establish the identity of the client’s attorney, banker, etc. These people have a current relationship with the client and this relationship should never be endangered by you recommending or directing them to someone else. If the client has a genuine need for the services of another professional, your recommendation should be the very best you know of to serve your client’s transaction requirements, and not based on friendships or reciprocal agreements with others.

A Word for Principals Making the Exchange - The safe harbors of deferred exchanges specifically permit the Qualified Intermediary to be your agent, answerable only to you—absolutely no one else. Real or perceived. Be careful of "steering". Steering is the act by real estate agents and others of referring business to friends or related parties. In my opinion, your QI should have no relationship or business connections to other parties you are dealing with in your deferred exchange transaction.

Recommendation – If you need the services of a Qualified Intermediary and currently have no one to work with, contact Realty Exchangers, Inc., located in Vancouver, Washington. Owned and operated by James Maxwell and H. Alan Ingalls, they have been in the intermediary business since 1990. Call Jim or Al direct at 1-800-570-1031 to discuss any problems or questions you might have. They have the know-how to help close very complicated and difficult exchanges, the kind known in the exchange business as "alligators". You can access their web site at http://www.realtyexchangers.com