Banks as a 1031 Exchange Qualified Intermediary

A couple months ago, we talked about the need to select your Qualified Intermediary (QI) carefully. Highly publicized failures of a couple larger intermediaries further highlight the need to select an exchange facilitator with security in mind. Banks are increasingly becoming involved in providing the services of a 1031 Exchange Qualified Intermediary.

If you think about it, it makes sense since that’s what banks do – hold money on your behalf. Exchanges typically result in sales proceeds being held until replacement property can be purchased and the exchange completed. There is a level of trust that is necessary for an investor to trust his exchange funds. Banks fulfill that needed role.

But what if you have an existing relationship with the bank? Does this disqualify your bank from being your Exchange Facilitator? According to a couple recent IRS rulings the answer is, no, they are NOT disqualified. In fact, your bank may be the safest and most prudent choice as your Qualified Intermediary.

Two recently released, nearly identical IRS Private Letter Rulings (200803003 and 200803014) involved exchange companies that were wholly-subsidiaries of a bank group. In these two cases, the banks provided investment advisory brokerage, private planning, insurance, trust, and retail banking services. In some instances, these subsidiaries would provide banking services to customers who also use the exchange services of the bank-owned Qualified Intermediary.

The IRS ruled that the provision of these types of services would not result in the Exchange Facilitator, or QI, being deemed a disqualified person under section 1031 of the Internal Revenue Code. Applying the factors put forth in a Supreme Court case (National Carbide Corp. v. Commissioner), the IRS held that insurance services did not create an agency relationship between the bank subsidiary and the exchanger.

Trust services - including principal and income accounting, fiduciary income tax services, distribution and valuation services, charitable trust services, bill payment, probate related services, and discretionary investment and asset management services - by an affiliate of the QI did not create an agency relationship. These were considered routine trust services that are not taken into account when determining whether the Qualified Intermediary is a disqualified person.

The IRS also ruled that routine banking services such as: consumer and small business lending, home financing, retirement and custodial services, check writing, direct deposit, online bill payment, and fee-refunded ATM transactions by an affiliate or by the QI itself, did not create an agency relationship. These services are considered routine financial services that are not taken into account when determining whether the QI is a disqualified person.

So can your bank also serve as your Qualified Intermediary? Based on these two Private Letter Rulings, it is pretty clear that, in most every case, your bank can accommodate your exchange. Given the increased safety and security they provide, the strict regulatory oversight they are under and the financial strength they possess, it seems prudent that a bank-owned Qualified Intermediary is a good place to start your 1031 exchange.

1031 Corporation Exchange Professionals is a subsidiary of FirstBank Holding Company - an $8.6 billion dollar bank with more than 120 retail locations in Colorado, Arizona and California. 1031 Corporation has been in business since 1990 and is a member of the Federation of Exchange Accommodators and the Denver Better Business Bureau.