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How Safe Are Your 1031 Exchange Funds? What to Ask a QI

Oct 7
4 min read

When you sell a property in a 1031 exchange, your sale proceeds go to your Qualified Intermediary (QI), and they stay there until you buy your replacement property. That can be up to six months. The most important question to ask when choosing a QI is simple: how will my money be protected while you hold it?

House key in a door lock

Why fund protection matters

There's no federal license for Qualified Intermediaries, and the IRS doesn't supervise how a QI holds client funds. A handful of states, including California, regulate exchange facilitators, but the rules vary and many states have none at all.

That gap has real consequences. In the past, some exchange companies failed or misused client money, and their clients lost both their funds and their tax deferral. Because you can't touch your exchange funds yourself, the protections your QI has in place are what stand between your money and a problem like that.

What to ask any QI

These are the questions we'd want answered if we were in your shoes.

1. Where will my money be held, and is it kept separate?

Ask whether your funds go into a separate account for your exchange or into a pooled account with other clients' money. Separate accounts make your funds easier to track and help keep them apart from the QI's operating money and other clients' funds. Ask which bank holds the funds, too.

2. Is the money FDIC-insured, and up to how much?

Standard FDIC insurance covers up to $250,000 per depositor, per bank, for each ownership category. Exchange proceeds are often well above that. Some QIs work with banking partners that spread funds across a network of FDIC-insured banks, which can extend coverage well beyond $250,000. Ask exactly how your funds are covered and up to what amount.

3. Who can move the money?

Ask how many people have to approve a wire or disbursement. Requiring more than one person to authorize outgoing funds is a basic control against both mistakes and theft.

4. Do you carry a fidelity bond?

A fidelity bond protects against loss from theft or dishonesty by the company's employees or principals. California requires exchange facilitators to carry a fidelity bond of at least $1 million, put up an equivalent deposit, or hold funds in a qualified escrow or trust account that requires the client's written authorization for withdrawals.

5. Do you carry errors and omissions insurance?

Errors and omissions (E&O) insurance covers mistakes in handling your exchange, such as a document or deadline problem. California requires at least $250,000 in E&O coverage or an equivalent deposit. Ask for the coverage amount.

6. Is the money kept safe and available?

Exchange funds should be kept safe and available, not put at risk for a higher return. Your money needs to be ready the day your replacement property closes. Ask whether the funds are ever held in anything other than bank deposits.

7. Are you independent of my other advisors?

Your QI can't be someone who has acted as your agent in the past two years, such as your real estate agent, attorney, accountant or employee, and it can't be a close relative. Using an independent QI keeps your exchange clean and keeps the roles clear.

8. What happens when I need the money?

Ask how quickly the QI can send funds to your closing agent, and who you'll be working with. Experience and responsiveness matter when a closing date is set and a deadline is coming.

Warning signs

  • Vague answers about where your money is held

  • Pooled accounts with no clear accounting for each client

  • One person able to move funds alone

  • Pressure to invest exchange funds for a higher return

  • No proof of bonding or insurance when you ask for it

How we protect our clients' funds

Here's how APX 1031 handles the money you trust us with:

  • Segregated escrow trust accounts. Each client's exchange funds are held in a segregated escrow trust account, apart from other clients' funds and from our operating funds.

  • FDIC insurance. Through our banking partnerships, exchange funds can be spread across a network of FDIC-insured banks, providing full FDIC insurance coverage of up to $180 million for a single client.

  • Qualified Escrow Agreements. For added security, we can utilize a Qualified Escrow Agreement, which requires bank approval for any movement of funds.

  • Dual authorization. Moving client funds requires internal approval from at least two people as well as a signed wire authorization from the client.

  • Fidelity bond. We carry a $1 million fidelity bond covering theft or dishonesty.

  • Errors and omissions insurance. We carry $2 million in E&O coverage for our exchange services.

If you'd like details on any of these, just ask. We're happy to walk you through them before you sign anything.

Next step

When you're under contract, put us in touch with your closing agent, usually your escrow officer, title company or closing attorney. We can get most exchanges set up the same day, and your exchange has to be in place before your sale closes.

APX 1031 is a Qualified Intermediary. We don't provide tax or legal advice; talk with your CPA or attorney about your situation.

 
 
 

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