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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A qualified intermediary bond usually means a fidelity bond that covers certain dishonest acts by the company handling your 1031 exchange. Review it along with bank coverage, protection against mistakes, and controls on moving your money. The word “bonded” alone does not tell you which losses are covered or how much a claim could pay.
During a typical deferred exchange, money from the sale waits to fund replacement property. That waiting period creates a separate question from whether the next investment is good: where is the cash, and who can move it?
Your qualified intermediary, or QI, helps carry out the exchange under a written agreement. The agreement limits your ability to receive or control the exchange money before the required conditions are met. These restrictions help support the tax treatment. They do not make the QI financially sound or guarantee that the funds are protected from every kind of loss. [1]
I would treat the money-handling review as its own job. A friendly contact, a large brand, or a polished website may be reassuring. I still want to know the legal company receiving the funds, the bank holding them, the account arrangement, and the process for approving a wire.
A fidelity bond belongs in that review, but it cannot replace it. Insurance addresses defined losses after something happens. Account controls try to keep the wrong thing from happening in the first place. Clear records help establish ownership and make either approach more useful.
Fidelity protection generally concerns specified dishonest acts. The covered people, acts, losses, and claim rights depend on the bond, endorsements, and applicable law. Do not assume that the name tells you the whole scope.
Washington provides an example. Its law gives covered exchange firms a fidelity-bond option. That bond protects clients who lose money from a covered dishonest act. It must cover employees and owners of a firm that is not publicly traded. The acts include fraud, embezzlement, and misuse of funds. These are rules for firms and exchanges within Washington's law. They are not a policy form used across the country. [2]
A missed deadline, a mistaken document, and an employee stealing money are different events. A bond designed for one of them may not address another. An outside criminal sending fake wire instructions may also raise different coverage questions from an employee taking funds. Ask the provider to explain those differences in writing.
It is also useful to ask who can bring a claim. Does the client have direct rights, or does a claim start with the insured business? Does the document name the actual exchange company? These questions need answers from the current contract and qualified advisers, not from a general statement that the firm is bonded.
| Protection | Question it helps address | Important limit |
|---|---|---|
| Fidelity bond | What happens after a covered dishonest act? | Specified acts, people, losses, and limits apply. |
| Errors and omissions coverage | What happens after a covered professional mistake? | A mistake does not automatically create a covered claim. |
| FDIC deposit insurance | What happens if the insured bank fails? | Ownership rules and deposit limits apply; it does not insure the QI's failure. |
| Account and wire controls | Who can move the money, and how is that checked? | Controls must work in practice and preserve exchange requirements. |
Errors and omissions insurance is often called E&O. Washington law treats it apart from fidelity coverage. Clients can bring claims for certain mistakes or things the firm failed to do. It is useful to keep those roles separate when you review another state's rules, too. [2]
FDIC insurance is different again. It protects eligible deposits at an insured bank when that bank fails. It does not turn a nonbank intermediary into an insured bank, and it does not cover the intermediary's bankruptcy or failure to perform its duties. [3]
Ask about each layer separately. A provider might have a strong answer about bank coverage and a weak answer about who approves wires. Another might have a large bond but unclear records of individual client balances. Combining those answers into one word, “safe,” hides the part you still need to examine.
Do not assume every QI operates under the same bond requirement. Start with the states and entities involved, then have counsel determine the applicable rules and exceptions. A company office, the old property's location, and the service being performed may all matter.
A covered Washington firm can use a fidelity bond of at least $1 million. It can instead use a qualified escrow or qualified trust that meets the law's conditions. Under that option, the firm and client must each verify a record of a withdrawal. The client must also receive current statements from the bank through an independent channel. The firm must show that it meets the rules before signing the exchange agreement. [2]
Washington separately requires at least $250,000 of E&O coverage or a permitted financial alternative. It also addresses how funds are held and how clients receive notice about their deposits. Reading only the bond amount would miss much of the protection framework.
These are examples, not a claim that Washington law governs every exchange. They also show why “every QI must have a bond” is too broad. A lawful alternative may exist. Ask which route the provider uses, which rules apply, and what evidence supports its answer.
Suppose your QI advertises a $10 million bond and you are placing $1 million with it. The headline sounds ample. Before relying on it, ask whether the limit is per client, per event, or shared across covered losses for a period.
If a hypothetical policy has a $10 million shared aggregate and there are $20 million of otherwise covered losses, the headline amount is less than the combined loss. That comparison does not tell us any one client's recovery. Claim priority, terms, exclusions, deductibles, and the legal process could affect the result. It simply shows why the denominator matters.
Also ask whether related companies share the protection. A parent company's bond may cover several affiliates, or it may not include the entity named in your exchange agreement. An old certificate may refer to a former name. A merger may have changed who is insured. Match the exact company names before comparing limits.
I would not choose an arbitrary minimum based only on my own balance. I would compare the scope and available limits with the provider's funds-handling exposure and the other controls in place. A coverage professional can help interpret a policy when the language is unclear.
Ask for current evidence of fidelity protection and E&O coverage, plus an explanation of any permitted alternative. A certificate is a useful starting point. It should not be treated as the entire contract or as proof that every possible claim will be paid.
These are review questions, not a list of terms every contract must contain in the same form. If the QI declines to share the full policy, ask for relevant provisions or written confirmation from an authorized insurer or broker. Have your adviser assess any gap that remains.
Verify the evidence through a trusted contact. A logo and a PDF are not independent confirmation. Use contact information established separately from an unexpected email. Keep the dated response with your exchange documents so you know what was represented before the money moved.
Ask which bank will receive the proceeds and how the account is titled. Find out whether your funds have their own account or are held in an account with other clients' money, and how your individual balance is recorded. Do not assume those two arrangements create identical legal rights.
The FDIC can allow deposit coverage to pass through an agent to the actual owner. This has conditions. The owner must in fact own the money. The bank's records must show that the account is held for others. The required records must also identify each owner and the owner's share. The FDIC reviews these facts when an insured bank fails. [4]
For exchange funds, the agreement and ownership structure deserve careful legal review. The FDIC warns that a debtor-creditor relationship can fail the ownership requirement for pass-through coverage. Do not assume that putting your name in a customer ledger or calling an account “escrow” settles that question.
Ask for a way to verify the deposit independently and confirm the expected balance after fees and interest. A statement from the QI and a bank record serve different purposes. The point is to understand where the cash is held and how the records connect that money with your exchange.
The standard FDIC limit is $250,000 per depositor, per insured bank, for each ownership category. Pass-through insurance is not an extra category. When the conditions are met, the deposit is combined with the owner's other deposits in the same category at that bank. [4] [5]
For example, assume $200,000 of your exchange funds qualify for pass-through coverage in the single-account category at Bank A. You also hold $100,000 directly in that same category at Bank A. The combined $300,000 is $50,000 above the standard limit. The intermediary account does not create a second $250,000 allowance just because it came through another channel.
This is a simplified example. Actual coverage depends on ownership and the records, not just the account nickname. A trust, business, or joint ownership arrangement may involve different rules. Use the FDIC's guidance and deposit estimator with complete facts, and ask the bank to help explain the result.
If the QI uses a deposit network, request the list of receiving banks and the placement process. Check for overlap with your other deposits, the treatment of interest, and when funds are actually placed. Several branches of one bank do not create separate insured banks. A network label alone does not prove full coverage. [5]
“We require authorization” leaves room for several meanings. Who gives it? How do they prove their identity? Can one employee create a wire and release it? What happens when someone is out of the office? Ask for a plain explanation of the process used for your transaction.
Useful topics include separate review by a second person, confirmation of the destination account, records of each approval, and a procedure for changes. Ask whether the bank enforces a restriction or the QI follows it as an internal practice. Those are not always the same control.
Your role must also fit the exchange agreement. You may help approve a permitted payment without having the right to take the cash yourself. Do not move the money into your own account just to feel safer. Receiving it, or gaining the right to use it, can affect the exchange. Have your advisers review any proposed change first. [1]
Plan for the final purchase early enough to complete each check. Find out who must sign and when the bank stops sending wires. You do not want to learn at closing that the signer is traveling. Check time zones, documents, and backup contacts while there is room to solve a routine problem.
Real estate payments are a target for business email compromise. A criminal may imitate a known contact or gain access to a real email account. A message can contain correct transaction details and still direct the funds to the wrong place. The FBI specifically warns about fake real estate wire instructions. [6]
Verify payment requests and changes through a trusted, independently established channel. Do not rely on the phone number in the message announcing a new account. Look up or use a number you already verified, then confirm the instructions with the proper person. An urgent tone is a reason to verify carefully, not skip the step.
Ask how the QI, closing company, and person receiving the funds will work together. Who can approve a change? Who keeps the record? Use multi-factor authentication to help protect your account, and check email addresses closely. Those steps help, but you still need to verify the payment request.
If you think a wire went to a criminal, call the sending bank at once. Report it to the FBI's Internet Crime Complaint Center, too. Tell the other parties using trusted contact details. Fast action cannot promise recovery. But do not lose time waiting for an insurer's answer before calling the bank. [6]
Keep two questions separate: whether you can recover the money and how the failed exchange is taxed. A bond claim, bank-account ownership issue, or court proceeding may address the first. None should be assumed to extend the exchange deadline or complete the purchase for you.
IRS Revenue Procedure 2010-14 provides a reporting safe harbor for certain failed exchanges involving a QI's bankruptcy or receivership. It has specific conditions. It can affect when gain is reported as payments are received; it does not make every failed exchange tax-free or replace the lost money. [7]
The procedure also has special rules for debt satisfied in excess of basis and for recapture. That is one reason not to reduce the result to “no cash back means no tax.” Your preparer needs the sale, debt, basis, court, recovery, and insurance records to determine the treatment.
Get legal and tax help promptly if you cannot access the funds. Keep the contracts, deposit records, emails, wire receipts, and proof of coverage. Ask your lawyer about claim notices and deadlines. A complaint, a lawsuit, and an insurance claim may each have their own process. Starting one does not mean you have protected every other right.
I would put competing providers' answers in a short table. Give each one a row for the legal entity, applicable state rules, fidelity protection, E&O, banking arrangement, verification method, and wire controls. Leave an unanswered item visibly blank.
For each important answer, record its source and date. “Salesperson said so” is different from an insurer's confirmation or an account agreement. If a document is unclear, mark the question as unresolved and ask the right person to interpret it before choosing the provider.
Also compare the service needed for your specific exchange. A complex ownership structure, several purchases, or an unusual closing schedule can create extra work. Strong protections and a workable process should fit together. The lowest service fee is not a complete comparison when the provider will handle a large part of your property's value.
No. Qualified intermediary refers to an exchange role with tax-rule requirements. It is not a promise from the IRS about the company's finances, insurance, staff, or service. Review the agreement, eligibility, safeguards, and applicable state rules. A bond is also not a government endorsement of the company.
The number alone cannot answer that. Check the scope, covered people, deductible, shared limits, claim rights, and your exposure. Also review account and wire controls. A statutory minimum, where applicable, is a legal baseline, not a finding that every client's full balance will be paid after any loss.
FDIC insurance covers eligible bank deposits when the insured bank fails, not the bankruptcy of a nonbank QI. Funds held through the QI may qualify for deposit coverage if the pass-through requirements are met. That does not guarantee immediate access during the QI's own failure or resolve every ownership dispute.
No. Fidelity protection generally concerns defined dishonest acts; E&O addresses defined professional errors or omissions. The actual contracts control, together with applicable law. Ask how each would respond to the risks you are trying to understand. Do not assume that a wire scam, missed deadline, and theft all fall under one policy.
No universal arrangement should be assumed from the QI label. State law, the exchange agreement, ownership, and provider practices matter. Ask where the funds will be held, how your balance is identified, what bank records show, and how withdrawals are approved. Have counsel review the arrangement without undermining the exchange's limits on access.
You can start with current evidence, a focused question list, and written explanations from authorized people. For a large balance or unclear wording, use a lawyer or insurance professional to review the relevant terms. Keep that advice and the supporting documents. A brief, accurate explanation is useful; an unsupported assurance is not.
Do not assume so. A possible insurance recovery is separate from meeting the 1031 exchange rules. The standard exchange deadlines still need attention, and any applicable relief requires its own analysis. If the QI fails, contact your tax adviser, attorney, and closing parties promptly instead of waiting for a claim to be settled.
The best time to understand the QI's protections is while you can still choose the arrangement and resolve questions. Once the sale closes, the exchange clock is running and the money is already somewhere.
Ask where it will be, who can move it, what losses are covered, and how you can verify the answers. Keep the evidence. Those steps do not remove every risk, but they give you a firmer basis for a decision than the word “bonded” on its own.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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