One of the most frequently asked 1031 Exchange questions we get is “How safe is my money?” The IRS has said that in order to provide “safe harbor” for your 1031 Exchange funds, they must be kept away from your immediate control and with a 3rd party. Well, that’s kinda scary, now isn’t it? Especially when you don’t know this company. The reality is that these days, no matter where you store your money, whether it’s with your personal bank, in your mattress or your bury it in the yard, when you deal with large amounts of cash, there is always risk. And this is whether you are doing a 1031 Exchange or not!
If you are planning a 1031 Exchange, picking a QI with an established reputation for handling investor money is a necessity. You want your funds stored with as much security as possible and this includes a reputable bank, FDIC insurance and a solid 1031 Exchange Agreement between you and your QI. You also want good a Qualified Escrow Agreement between yourself, the QI and the QI’s bank. This added protection is optimal because with a Qualified Escrow Agreement, no one is able to move your funds without your signature.
Here is where you have to be careful. Several years ago a couple of individuals in the 1031 Exchange industry got the bright idea of spending client funds in high-risk, high-yield investments. And this was during a time when interest rates were much higher! Long story short, they lost some client money and they got caught. And, because of this greed, we all have had to suffer from a lack of trust with the general public. Might I also add that everyone who ever tried to steal a client’s 1031 Exchange money has been caught? Who cares. When it comes to your money, you want the best security possible, right?
Here is where the fear comes in. Several large 1031 Exchange companies are using this lack of trust to motivate investors with fear. Their message appears to be “Who do you trust?”. “We’re large, we would never think of stealing your money.” Or. “We’ve got a bunch of attorneys looking after it for you.” Hm. In light of the recent Wall Street banking scandals, these claims don’t seem to hold much water, do they?
Have no fear. Take control yourself. Regardless of the size of the 1031 Exchange Company you are considering, the best plan is to call the QI direct. Ask them to provide banking references as well as licensing, bonding and insurance information. And be sure to check those references out! Ask questions. Get informed. Most states have rules regarding how they allow QI’s to function. Find out what those rules are. The more you know, the more comfortable you will be with allowing a 3rd party to watch of your money until you are ready to spend it and complete your 1031 Exchange.