While local QIs offer proximity and knowledge of specific regulations, national QIs like Accruit provide broader expertise, resources, and risk management capabilities. National QIs understand regulations across the country, including state-specific mandates, such as those in Colorado and California.
Local QI vs. National QI
Generally, the most important aspect of picking a Qualified Intermediary to help an Exchanger carry out their 1031 Exchange is peace of mind, competency, and dependability. These attributes are not exclusive to local businesses, in fact they might be more commonly found with a national QI.
When considering a QI for a 1031 Exchange, the decision shouldn’t be based on proximity, but rather several other factors that have a greater impact on the exchange, including the following:
Experience & Expertise
Local: Knowledgeable of specific local regulations & transactions, smaller volume of cases, limited expertise in complex transactions
National: Knowledgeable of wide range of regulations & transactions across different states, larger volume of cases, greater expertise with complex transactions
Resources to Scale
Local: May be more limited on resources, work on a smaller scale with fewer cases, locally concentrated network
National: Typically, robust resources and efficient handling of large volume of cases, wider network of professionals
Risk Mitigation
Local: Might not be able to offer the same level of risk mitigation
National: Likely to have strong insurance coverage and bonding in place, added safeguards for clients
While both types of QIs have their benefits, national QIs tend to offer wider expertise, resources, and risk management capabilities. However, the decision ultimately depends on individual needs, transactional complexity, and personal preferences.
State Regulations for QIs
When selecting a Qualified Intermediary, there are many options to choose from, some local and some national. While the idea of a local QI may seem attractive, a nationally recognized QI could provide the Exchanger with a better experience and more robust knowledge of the rules & regulations of IRC Section 1031, including the most recent court cases.
It’s important to remember there is no federal regulation of Qualified Intermediaries, however there are some state-level regulations in a handful of states that are meant to protect the Exchanger when facilitating an exchange with Relinquished Property within that state. We will focus on Colorado, Accruit’s headquarters, and California, a state with some of the most extensive requirements for Qualified Intermediaries.
Colorado
Requirements for Qualified Intermediaries conducting 1031 Exchanges vary from state-to-state. In 2009, Colorado’s legislature passed Senate Bill 1007, Chapter 708 which include:
Identical fidelity bond and Errors & Omissions (E&O) policy.
QIs must act as custodians and maintain strict management of client funds.
The California Franchise Tax Board mandates QIs to withhold 31/3% of the sales price for the Exchanger if the exchange fails.
For 1031 Exchanges involving out-of-state property, California enforces a “claw back”