FDIC Insurance on 1031 Exchange Funds

So you are considering a 1031 exchange and you have selected a Qualified Intermediary (QI) to facilitate your exchange. The property you are selling is under contract and the closing is next week. You have begun the search for suitable replacement property but have not yet found anything appropriate. The money from your sale, it appears, is going to be held by the Qualified Intermediary for some time. But what will that QI do with the funds while you await the need for those proceeds in a replacement property purchase? How do you know your funds are secure?

The range of investments a Qualified Intermediary can make with your exchange funds is not currently regulated. Therefore, the funds can be accounted for and placed in many different investment vehicles. Knowing how your exchange funds are protected is vital when selecting a intermediary partner. While we've previously explored the security features of bonding and making sure you deal with a firm that is financially stable and uses segregated accounts, we haven't discussed the issue of Federal Deposit Insurance as a security vehicle when discussing 1031 exchange funds.

Many larger Qualified Intermediaries co-mingle client funds into one investment account. They do this to maximize the return on investment for the QI firm. From there, the funds may be invested with a brokerage or depository institution. Other QI firms segregate each client's funds into a separate account held at a commercial bank. While many of these brokerage accounts can be just as secure in the instruments they invest, it certainly pays to investigate whether your funds are co-mingled or segregated and exactly where and what the funds are being invested.

Okay, now you've determined that it is in your best interest to use a Qualified Intermediary that is depositing the funds into a segregated account at a commercial bank. But your exchange proceeds are more than $250,000. The amount you receive exceeds the amount of FDIC insurance and you are concerned with the added protection this level of insurance would provide. So, now what?

Some Qualified Intermediaries, including our firm, provide the ability to open multiple exchange accounts to the same client under separate bank charters. What this allows is the ability to increase the overall FDIC insurance coverage to the number of institutions times $250,000 at each charter. For example, 1031 Corporation Exchange Professionals is a subsidiary of FirstBank. With 26 separate charters in Colorado, Arizona and California, 1031 Corporation has the capacity to open multiple accounts and extend the FDIC coverage for any one exchange client up to $6.5 million.

Selecting a Qualified Intermediary that only uses segregated accounts banked at a financially solid, commercial bank (and further - owned by a larger financial parent) are important safety features to consider. Still, having a government-sponsored insurance, like the one the FDIC provides, for the amount of your exchange can certainly add an extra layer of confidence that your funds are secure.