When navigating the complex world of 1031 tax-deferred exchanges, one role stands as the cornerstone of a successful transaction: the Qualified Intermediary. Without this critical third party, most 1031 exchanges would fail to meet IRS requirements, potentially costing investors thousands or even millions in unnecessary taxes. Understanding what a Qualified Intermediary does and how to select the right one can make the difference between a smooth, compliant exchange and a costly tax disaster.
What is a Qualified Intermediary?
A Qualified Intermediary (QI), also known as an accommodator or facilitator, is an entity that facilitates Internal Revenue Code Section 1031 tax-deferred exchanges. According to Treasury Regulation §1.1031(k)-1(g)(4), a QI is a person who is not the taxpayer or a disqualified person, and who enters into a written agreement with the taxpayer to facilitate the exchange.
The QI creates documentation supporting a taxpayer’s intent to conduct a 1031 exchange and holds the exchange proceeds in a manner that preserves principal and liquidity. This role is crucial because the IRS prohibits taxpayers from having actual or constructive receipt of the funds during the exchange process.
While sometimes referred to as an “accommodator” or “facilitator,” the official IRS designation is “Qualified Intermediary.” This terminology is important when verifying credentials and ensuring compliance with tax regulations.
Key Responsibilities of a Qualified Intermediary
The responsibilities of a Qualified Intermediary extend far beyond simple paperwork. Under Treasury Regulations, a QI must perform specific functions to maintain the tax-deferred status of your exchange.
- Prepare and execute the exchange agreement
- Create assignment agreements and notices
- Acquire the relinquished property from the taxpayer
- Transfer the relinquished property to the buyer
- Hold exchange funds securely during the exchange period
- Acquire the replacement property from the seller
- Transfer the replacement property to the taxpayer
- Ensure compliance with IRS timelines and regulations
The exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain benefits from the exchange funds held by the QI, as specified in Treasury Regulations §1031.1031(k)-1(g)(4)(i). This restriction is fundamental to maintaining the tax-deferred status of the transaction.
Why a Qualified Intermediary is Mandatory
In most 1031 exchanges, using a Qualified Intermediary is not just advisable—it’s mandatory. The IRS has established strict rules regarding “constructive receipt” of funds that make direct exchanges between two parties extremely rare and difficult to execute properly.
Without a QI, the taxpayer risks having actual or constructive receipt of the exchange funds, which would disqualify the entire transaction from 1031 treatment. This could trigger immediate capital gains tax and depreciation recapture tax—potentially as high as 40% of the sale price in high-tax states like California.
Benefits of Using a Qualified Intermediary
- Ensures compliance with IRS regulations
- Provides proper documentation for tax reporting
- Secures exchange funds in segregated accounts
- Manages critical timelines (45-day identification, 180-day completion)
- Offers expertise on complex exchange scenarios
Risks of Not Using a Qualified Intermediary
- Disqualification of the 1031 exchange
- Immediate tax liability on capital gains
- Depreciation recapture taxes
- Potential IRS audit and penalties
- Loss of tax deferral benefits
Who Cannot Serve as a Qualified Intermediary?
The IRS strictly defines who cannot serve as a Qualified Intermediary. These “disqualified persons” include anyone who has acted as the taxpayer’s agent within the two-year period ending on the date of the property transfer. Specifically, this includes:
- The taxpayer’s employee, attorney, accountant, investment banker or broker
- A real estate agent or broker who represented the taxpayer in the past two years
- Any person related to the taxpayer or their agent (family members)
- Business entities in which the taxpayer or agent has more than 10% ownership
There are limited exceptions for financial institutions providing routine services unrelated to the exchange. However, using a disqualified person as your QI removes the safe harbor protection of the exchange regulations and could invalidate your entire 1031 exchange.
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How to Select a Reputable Qualified Intermediary
The Qualified Intermediary industry is not regulated nationally, making careful selection essential. When choosing a QI, consider these critical factors:
Essential Questions to Ask Before Hiring a QI
- What is your experience and expertise? Look for QIs who specialize in 1031 exchanges as their primary business, not as a side service.
- Do you have Certified Exchange Specialists® on staff? This certification from the Federation of Exchange Accommodators (FEA) indicates specialized training.
- How are exchange funds protected? Verify that funds are held in segregated, FDIC-insured accounts or protected by fidelity bonds.
- Do you use qualified escrow agreements? These require dual signatures (yours and the QI’s) for any disbursement of funds.
- What is your fee structure? Understand all costs upfront, including how interest earned on exchange funds is handled.
- Are you a member of the FEA? Members adhere to a code of ethics and undergo background checks.
- What is your availability during the exchange period? Ensure they’re accessible when critical deadlines approach.
The Federation of Exchange Accommodators (FEA) is the national trade association for Qualified Intermediaries. Membership in the FEA indicates a commitment to professional standards and ethics in the industry.
Case Study: How Asset Preservation, Inc. Facilitates 1031 Exchanges
Asset Preservation, Inc. (API) exemplifies the comprehensive services that a professional Qualified Intermediary provides. As a leading national QI, API facilitates exchanges in conformity with IRS regulations through a structured process:
| Service Component | Description | Benefit to Investor |
| Coordination with Advisors | Works with taxpayer’s attorney and tax advisor to ensure understanding of 1031 regulations | Integrated approach with existing professional team |
| Documentation Preparation | Creates exchange agreement, assignment agreements, notices, and closing instructions | Ensures all paperwork meets IRS requirements |
| Transaction Facilitation | Interfaces with title companies and closing attorneys to properly structure the exchange | Smooth coordination between all transaction parties |
| Fund Security | Holds exchange proceeds in segregated accounts with additional security measures | Protection of funds during the exchange period |
| Timeline Management | Provides guidance on critical 45-day identification and 180-day completion deadlines | Prevents timeline-related exchange failures |
This structured approach ensures that exchanges facilitated by API meet all IRS requirements while providing investors with peace of mind throughout the process. Their expertise is particularly valuable in complex exchanges involving multiple properties or special circumstances.
Frequently Asked Questions About Qualified Intermediaries
Can I act as my own Qualified Intermediary?
No. The IRS specifically prohibits the taxpayer from serving as their own QI. Additionally, anyone who has acted as your agent (attorney, accountant, real estate broker, etc.) within the past two years is considered a “disqualified person” and cannot serve as your QI.
How much does a Qualified Intermediary cost?
Fees typically range from 0-
Frequently Asked Questions About Qualified Intermediaries
Can I act as my own Qualified Intermediary?
No. The IRS specifically prohibits the taxpayer from serving as their own QI. Additionally, anyone who has acted as your agent (attorney, accountant, real estate broker, etc.) within the past two years is considered a “disqualified person” and cannot serve as your QI.
How much does a Qualified Intermediary cost?
Fees typically range from $600-$1,500 for standard exchanges, with more complex transactions commanding higher fees. Some QIs charge a flat fee, while others base their fee on a percentage of the exchange amount. Additionally, ask about how interest earned on exchange funds is handled—some QIs share this interest with clients.
When should I engage a Qualified Intermediary?
You must engage a QI before closing on the sale of your relinquished property. Ideally, you should select your QI several weeks before closing to allow time for proper documentation preparation. Waiting until the last minute can create unnecessary complications and risks.
What happens if my Qualified Intermediary goes bankrupt during my exchange?
This highlights the importance of selecting a reputable QI with proper security measures. If your QI uses segregated accounts with qualified escrow agreements requiring your signature for disbursements, your funds should remain protected. Additionally, some QIs carry fidelity bonds or other insurance to protect client funds.
,500 for standard exchanges, with more complex transactions commanding higher fees. Some QIs charge a flat fee, while others base their fee on a percentage of the exchange amount. Additionally, ask about how interest earned on exchange funds is handled—some QIs share this interest with clients.
When should I engage a Qualified Intermediary?
You must engage a QI before closing on the sale of your relinquished property. Ideally, you should select your QI several weeks before closing to allow time for proper documentation preparation. Waiting until the last minute can create unnecessary complications and risks.
What happens if my Qualified Intermediary goes bankrupt during my exchange?
This highlights the importance of selecting a reputable QI with proper security measures. If your QI uses segregated accounts with qualified escrow agreements requiring your signature for disbursements, your funds should remain protected. Additionally, some QIs carry fidelity bonds or other insurance to protect client funds.
Security Measures for Exchange Funds
One of the most critical aspects of selecting a Qualified Intermediary is understanding how they protect your exchange funds. Without proper security measures, your capital could be at risk during the exchange period.
Warning: The Qualified Intermediary industry is not federally regulated. Due diligence in selecting a QI with proper security measures is essential to protect your exchange funds.
Recommended Security Measures
Segregated Accounts
Your funds should be held in a separate account, not commingled with the QI’s operating funds or other clients’ money.
FDIC Insurance
Verify that funds are held in FDIC-insured accounts, though be aware of the $250,000 per account limitation.
Qualified Escrow Agreements
These require dual signatures (yours and the QI’s) for any disbursement, preventing unauthorized access to funds.
Fidelity Bonds
Some QIs carry additional insurance to protect against employee dishonesty or fraud.
Written Security Policies
Ask for documentation of the QI’s security protocols and fund handling procedures.
Independent Audits
Regular third-party audits of the QI’s financial practices provide additional assurance.
When interviewing potential Qualified Intermediaries, ask specific questions about these security measures and get written confirmation of how your funds will be protected throughout the exchange period.
Critical Timelines in a 1031 Exchange
A Qualified Intermediary plays a crucial role in helping investors navigate the strict timelines imposed by IRS regulations. Missing these deadlines will disqualify your exchange, regardless of circumstances.
Day 0: Sale of relinquished property closes
Day 45: Deadline to identify potential replacement properties (Identification Period)
Day 180: Deadline to complete acquisition of replacement property (Exchange Period)
Your Qualified Intermediary should provide regular reminders as these deadlines approach and help you understand the specific requirements for property identification and documentation. They should also coordinate with all parties involved to ensure timely closings within these IRS-mandated timeframes.
Ensure Your 1031 Exchange Success
Don’t navigate the complex world of 1031 exchanges alone. Work with experienced Qualified Intermediaries who understand the nuances of tax-deferred exchanges and can protect your investment.
Conclusion: The Value of a Professional Qualified Intermediary
A Qualified Intermediary is not just a legal requirement for most 1031 exchanges—they’re an essential partner in preserving your wealth through tax deferral. By facilitating the transaction according to IRS regulations, securing exchange funds, and ensuring compliance with critical timelines, a professional QI helps investors navigate the complexities of Section 1031 with confidence.
When selecting a Qualified Intermediary, prioritize experience, security measures, and professional credentials. Organizations like the Federation of Exchange Accommodators (FEA) can help you locate reputable QIs who adhere to industry best practices and ethical standards.
Remember that the success of your 1031 exchange—and the deferral of potentially significant tax liabilities—depends largely on the expertise and professionalism of your Qualified Intermediary. Choose wisely, and your investment portfolio will benefit for years to come.
