CES Qualified Intermediary Role & Responsibilities 2 — Questions and Answers
Question 1: Which of the following is a key due diligence step an exchanger should take when selecting a QI?
- Confirm the QI offers the lowest fee in the market
- Verify the QI carries fidelity bond and errors & omissions insurance (Correct answer)
- Ensure the QI is a licensed real estate broker
- Confirm the QI is a subsidiary of a national bank
Correct answer: Verify the QI carries fidelity bond and errors & omissions insurance
A prudent exchanger should verify that the QI carries fidelity bond coverage and E&O insurance to protect against fraud or errors.
Question 2: The QI's exchange agreement must be in place before what event to properly structure the exchange?
- Before the replacement property is identified
- Before the taxpayer closes on the relinquished property (Correct answer)
- Before the taxpayer signs the listing agreement for the relinquished property
- Before the end of the tax year
Correct answer: Before the taxpayer closes on the relinquished property
The exchange agreement must be executed before the closing of the relinquished property to prevent constructive receipt of the proceeds.
Question 3: Can a QI provide legal or tax advice to the taxpayer as part of their exchange services?
- Yes, QIs are required to provide tax guidance
- No, QIs should refer taxpayers to their own independent legal and tax advisors (Correct answer)
- Yes, if the QI employs a licensed CPA
- Yes, for exchanges under $1 million in value
Correct answer: No, QIs should refer taxpayers to their own independent legal and tax advisors
QIs are not tax or legal advisors; they should always refer taxpayers to independent qualified professionals for tax and legal guidance.
Question 4: In a simultaneous exchange, how does the QI coordinate the transfer of funds and deeds?
- The QI acquires title to both properties before transferring them
- The QI coordinates closing so that the relinquished and replacement property transfers happen on the same day (Correct answer)
- The QI holds both properties for 45 days before transferring
- The QI transfers funds only after both deeds are recorded
Correct answer: The QI coordinates closing so that the relinquished and replacement property transfers happen on the same day
In a simultaneous exchange, the QI coordinates closings so both the relinquished and replacement properties transfer on the same day.
Question 5: What is the significance of the 'safe harbor' provisions in the Treasury Regulations for QIs?
- They allow the QI to take title to exchange properties without tax consequence
- They allow the taxpayer to use a QI without triggering constructive receipt, as long as specific conditions are met (Correct answer)
- They eliminate the need for a written exchange agreement
- They permit the QI to invest exchange funds in equities
Correct answer: They allow the taxpayer to use a QI without triggering constructive receipt, as long as specific conditions are met
The safe harbor provisions under Treas. Reg. §1.1031(k)-1 establish conditions under which using a QI does not result in constructive receipt by the taxpayer.
Question 6: What is the QI's responsibility when it receives the relinquished property proceeds at closing?
- Invest the funds in short-term securities to generate interest
- Hold the funds in a secure account and use them solely to acquire the replacement property (Correct answer)
- Transfer the funds back to the taxpayer for safekeeping
- Hold the funds until the IRS confirms the exchange
Correct answer: Hold the funds in a secure account and use them solely to acquire the replacement property
The QI must hold the exchange proceeds and use them exclusively for acquiring the replacement property as directed by the exchange agreement.
CES Qualified Intermediary Role & Responsibilities 2
Which of the following is a key due diligence step an exchanger should take when selecting a QI?