What Is a Qualified Intermediary? The QI’s Role in Your 1031 Exchange

By Jerry Baker

A qualified intermediary, or QI, helps carry out a deferred 1031 exchange under a written agreement. This independent party connects your sale to your purchase while limiting your access to the sale proceeds. Choosing that party before your sale closes is one of the most important steps in planning an exchange.

What does a qualified intermediary do?

Think of a QI as the party responsible for the exchange mechanics. The QI signs an exchange agreement and takes the required role in your sale and purchase contracts. It also directs money through the exchange. The goal is to meet a regulatory safe harbor, which is a set of rules for a specified tax result. It is not a guarantee that every part of your transaction qualifies. [1]

The QI may also provide identification forms, track closing dates, and coordinate with escrow. The exact services depend on the agreement. Ask what the firm will do and what it expects you to do. Find out which questions belong with your attorney or CPA. A helpful person on the phone is valuable. A clear written scope is valuable, too.

You may also hear a QI called an exchange accommodator or facilitator. Whatever the label, I want to know the legal entity accepting the job, who handles the money, and how the exchange will be documented. A logo and a reassuring title do not answer those questions.

Why the QI needs to be involved before closing

A 1031 exchange involves more than selling one property and buying another. The rules distinguish an exchange from a sale followed by a purchase. Taking all the sale proceeds yourself can turn the transaction into a sale even if you later buy suitable property within the usual deadlines. Sending that money to a QI afterward does not erase the earlier receipt. [1]

The same concern applies when money is available to you even though you never withdraw it. This is called constructive receipt. If you have an unrestricted right to take the proceeds, simply leaving them in an account may not solve the problem. The agreement and the actual handling of the money both matter.

Before closing, give the QI the signed sale contract, the expected transfer date, the seller's ownership details, and the escrow contact. Have the QI confirm the required documents and assignment notices are in place. Do not assume a sentence saying you intend to exchange completes this work. The contract language, assignments, money controls, and closing instructions must work together.

What does “qualified” actually mean?

The federal QI safe harbor has specific conditions. The intermediary cannot be you or a disqualified person. It must enter a written exchange agreement and acquire and transfer the relevant properties in the manner the regulation recognizes. The agreement must restrict your ability to receive, borrow, pledge, or otherwise benefit from the money before permitted release points. [1]

This is a tax-law definition. It should not be read as an IRS endorsement of a particular business, its staff, its bank accounts, or its insurance. Ask the provider to explain how it meets the definition in your transaction. Then review financial and operational protections separately.

State requirements are another subject. For example, Maine maintains a licensing page specifically for exchange facilitators, with links to its statute, rules, and application forms. That does not establish the rules in California or every other state. Ask counsel which state's requirements apply to the company and your exchange, and verify any claimed license with the relevant regulator. [8]

Can your attorney, accountant, or broker be the QI?

Do not assume that a professional you already trust can also serve as your QI. The regulation treats several people as your agent based on services they performed for you. The lookback is two years ending on the transfer of your first relinquished property. The list includes your employee, attorney, accountant, investment banker or broker, and real estate agent or broker. [1]

There are exceptions. Services connected with intended Section 1031 exchanges are excluded from that service test. Certain routine financial, title insurance, escrow, or trust services provided by the named types of institutions are also excluded. Related-person rules apply as well. Those rules can involve ownership and family relationships, so checking only the name on an invoice is not enough.

Give the QI and your attorney a short list of recent service providers and relevant relationships. Ask for a written explanation if a connection appears close. The goal is to find a problem with the safe harbor before money moves. It is much easier to choose another provider at the start than to debate eligibility after closing.

Does the QI have to appear on the deed?

Not necessarily. The regulation recognizes methods in which the intermediary is treated as acquiring and transferring property without taking record title. Assigning contract rights to the QI can be part of this structure. When that method is used, all parties to the agreement must receive written notice of the assignment on or before the relevant property transfer. [1]

For an ordinary forward exchange, the deed may go directly from you to the buyer and from the replacement seller to you. That direct deed path does not mean the QI was unnecessary. Its role is established through the required agreements and actions.

Ask who prepares the assignment, who sends each notice, and where proof is saved. If the buyer changes, an entity name changes, or the closing date moves, tell the QI promptly. A file built around an old contract may no longer describe what is actually closing. Keep the executed documents rather than relying on an unsigned draft sent earlier.

Where will your exchange money sit?

I would want this answer before signing: identify the bank, account arrangement, account title, and people who can approve transfers. Ask whether the money is held in an account devoted to your exchange or pooled with other client funds. If it is pooled, ask how your balance is recorded and reconciled.

Also ask whether the QI can move deposits to another bank or change the placement arrangement. Find out what notice you receive and whether you can view account activity. A dashboard balance is useful, but I would also ask what records support it and how a problem would be resolved if the dashboard stopped working.

Federal banking agencies have warned that third-party deposit arrangements can create recordkeeping problems and delays in customer access. Their statement is broader than 1031 exchanges; it is not a finding against your QI. It does explain why I care about the bank's access to records and the plan for a service disruption. [6]

Have your attorney examine who legally owns the deposit, the contract's treatment of insolvency, and any limits on your claims. Do not assume that the words “separate account” settle every legal issue. The account documents, exchange agreement, and applicable law need to support the protection being described.

What does FDIC insurance protect?

FDIC deposit insurance concerns covered deposits at an insured bank. The standard maximum is $250,000, with coverage depending on the depositor, bank, and ownership category. Multiple account numbers do not by themselves create separate coverage. A QI's deposit arrangement needs a closer look than a statement that the bank is insured. [5]

When an agent holds money for an owner, insurance can pass through to the underlying owner under the applicable rules. The bank and other required records must support that relationship and show who owns the money. Funds must actually belong to the people claimed as owners. The rules are not satisfied by a marketing promise alone. [3] [4]

Consider a simplified example. You have $100,000 in your own single-owner savings account at Bank A. An additional $200,000 held through an agent qualifies for pass-through coverage to you in that same category at Bank A. The combined amount is $300,000, not two separately insured balances. With a $250,000 limit and no other relevant deposits, $50,000 is above the limit.

That example assumes ownership and record requirements are met and ignores accrued interest. Your facts may differ. Ask the QI and bank to explain the coverage math. Include deposits you already have. Also separate bank failure from QI failure: deposit insurance does not protect you against the failure of the nonbank third party itself. [6]

Ask about both insurance and transfer controls

Request details of any fidelity bond, errors-and-omissions coverage, or other policy the QI cites. Ask who is insured, what events are covered, what exclusions apply, and whether the limit is shared across many clients. Ask who can bring a claim. A large policy limit is less informative without those details.

Then ask how a transfer is approved. Who verifies the recipient? Are two staff members involved? How are changes to wire instructions checked? How is your written approval obtained without giving you unrestricted access to the proceeds? Your attorney and QI should keep the fraud controls consistent with the exchange restrictions.

The FBI recommends verifying changes in account information through a separate channel. Use a phone number established independently, rather than a number inside the email announcing the change. If you suspect a fraudulent transfer, contact the financial institution immediately and report it to IC3. Recovery is not assured, so prevention belongs in the closing plan. [7]

Who is responsible for the deadlines?

The QI can help track them. The tax rules still apply to your exchange. Generally, identify replacement property within 45 days after transferring the relinquished property. Receive the replacement property by the earlier of 180 days after that transfer or the tax return due date, including extensions, for that year's return. The 45-day period runs inside the exchange period. [1]

The regulation measures these deadlines to midnight. That does not mean a bank, escrow office, sponsor, or QI can complete its work at midnight. Get each party's earlier business cutoff in writing and plan around it. If you need a tax-return extension to preserve the full exchange window, have your tax preparer handle that issue before the filing deadline.

Identification is a signed written designation with a clear property description, sent to a permitted recipient within the required time. Sending it only to yourself does not work. The regulation has specific recipient rules; a QI involved in the exchange is a common recipient. Ask it to acknowledge receipt and check the description well before the last day.

There are also limits on how many properties you may identify and their combined values. A list of possible purchases in your notes is not necessarily a valid identification. Ask the QI and your tax advisor which rule you are using and how the selected interests are counted. A backup that exceeds the permitted limits can create a bigger problem than it solves.

Can you change your mind and take the money?

The agreement should explain permitted release points. In the QI safe harbor, you generally cannot demand the money whenever you like. An agreement may permit release after the identification period if you identified no replacement property. If you did identify property, different restrictions apply. [1]

Potential release points include receiving all replacement property you are entitled to under the agreement. Another rule concerns a material and substantial written contingency arising after the identification period, beyond the control specified in the regulation. A change of mind is not automatically such a contingency. Have the QI and counsel review the facts before expecting an early release.

These restrictions are a reason to keep personal emergency funds outside the exchange. Tell your CPA in advance if you want cash out. A partial exchange may be possible, with current taxable gain, but it needs to be structured and measured. Do not assume a personal withdrawal is harmless because most of the proceeds remain with the QI. [2]

Compare the full cost, including interest

Ask for a written fee schedule based on your actual transaction. It should address the number of properties, separate closings, wire charges, amendments, cancellation terms, and any added work. Tell the QI about complex ownership issues or unusual assets. Ask whether it handles that work or refers it elsewhere.

Also ask who receives interest earned on the funds. If the QI keeps some or all of it, understand the arrangement rather than comparing only the setup fee. The regulation has rules for interest or growth factors and restrictions on access to them. Your CPA should review how any interest credited to you is reported. [1]

A hypothetical comparison helps. Suppose two otherwise comparable proposals differ by $300 in fees and by $1,500 in estimated interest credited to you. The lower stated fee is not necessarily the lower total cost. Interest rates, time held, balances, and terms may change, so treat the estimate as a comparison tool, not a promised payment.

Keep each person's job clear

Your QI manages the agreed exchange functions. Your CPA evaluates the tax result and reporting. Your attorney reviews legal issues and documents within the agreed scope. Escrow or the closing attorney handles the closing tasks assigned to it. The people helping evaluate investments have a different job: understanding the property, sponsor, risks, and fit.

For a DST purchase, coordinate the QI's documents with the sponsor's acceptance and funding process. Sending money or signing a subscription is not a substitute for confirming when the interest was actually acquired. Ask for the final accepted documents and closing confirmation. The exchange requires receipt of the replacement property within the applicable period. [1]

After closing, gather the exchange agreement, assignments, notices, identification, proof of delivery, settlement statements, transfer confirmations, and ownership records. Give the CPA a complete package. Form 8824 reports the exchange and calculates deferred gain, any currently recognized gain, and the basis of the replacement property. The QI's closing balance is not that tax calculation. [9]

Test the plan before you need it

Try a short practice run with the people on your file. Suppose you are away from home when escrow needs a signed form. How will you get it? Can you sign it from your phone? Who can help if the link fails? These are small questions until there is very little time left.

Next, imagine that a replacement purchase falls through. Ask which people need to know, which funds are still committed, and which approved backup could close. Do not wait for a failed deal to learn that your backup needs a fresh loan or a review that takes weeks. A QI can help trace the exchange steps, but it cannot make a seller, lender, or sponsor accept your terms.

Keep a one-page contact sheet with names, phone numbers, time zones, and the person who fills in for each key contact. Agree on how changes are shared. If the sale date moves, one person should send the new date to the whole team and ask for updated plans. If an email has no reply, follow up while there is time.

I would also keep a decision log. Record the date, the question, who answered it, and where the supporting document is saved. Use it for choices about cash out, account terms, and final purchase amounts. This is a practical record for your team, not a substitute for signed legal documents.

The best time to find a gap is before the sale. You do not need to become an exchange expert. You do need to know who owns each task, when it must be done, and how you will know it is complete.

Questions I would ask before hiring a QI

• Which legal entity signs the agreement, and who handles my file if my main contact is unavailable?
• Have you reviewed any relationships that could disqualify you in my exchange?
• Where are the funds held, who owns the deposit, and who can authorize a transfer?
• How are balances, bank coverage, and transfer instructions verified?
• What are the written fees, interest terms, and permitted release conditions?
• Who checks assignments, identification documents, and closing deadlines?
• What is the process if a property falls through or there is a bank or technology problem?
• Which documents will I receive for my attorney and tax preparer?

I would save the answers with the proposal. Compare clear responses, supporting documents, and practical service arrangements. A QI holds an important place in your exchange. You should understand that role before entrusting it with the proceeds.

Frequently asked questions

Is a qualified intermediary required for every 1031 exchange?

The QI arrangement is a regulatory safe harbor commonly used in deferred exchanges, rather than a statement that every possible exchange must use one. Other structures exist. For a planned sale followed by a purchase, arrange the structure with counsel before closing instead of trying to improvise after receiving proceeds. [1]

Can my own bank account hold the exchange money?

Putting the proceeds into an account you can freely access creates actual or constructive receipt concerns. The exchange needs properly documented limits on your rights. Merely promising not to spend the money does not create the QI safe harbor. [1]

Does a QI's involvement guarantee full tax deferral?

No. Property eligibility, investment use, timing, identification, money received, debt, and other rules still matter. A QI helps with the agreed exchange mechanics. Have your tax advisor calculate the result and review any issue beyond the routine closing process. [2] [9]

Can my longtime CPA act as the intermediary?

Ordinary accounting work during the relevant two-year lookback can make the CPA a disqualified person. The regulation contains exceptions, including exchange-related services, plus related-person rules. Have the exact history reviewed rather than assuming a professional license makes the person eligible. [1]

Does the intermediary own my replacement property afterward?

In the completed exchange, you receive the replacement property or qualifying interest. The QI's contractual role does not mean it remains your landlord or investment manager. Confirm the final ownership documents and distinguish the intermediary from any trustee or sponsor associated with your investment. [1]

Is all the cash insured if the QI uses an insured bank?

Not automatically. Coverage depends on actual ownership, account records, deposit category, balances, and the bank. Existing deposits can reduce remaining coverage at that bank. Deposit insurance also does not insure against the failure of a nonbank QI itself. [3] [4] [6]

What if the QI causes me to miss the deadline?

The IRS instructions warn that missing the exchange deadlines because of the QI does not make the transaction qualify. Certain bankruptcy or receivership situations may have separate gain-reporting relief if their conditions are met. That is not a general extension or guarantee of recovery; involve counsel and your CPA promptly. [9]

What should I do first if my sale is approaching?

Contact your tax advisor, attorney, and proposed QI now. Share the contract, ownership information, and closing date. Get written confirmation of what must be completed before transfer, then work backward from the earliest operational cutoff. Give the exchange setup the same attention you give the property purchase.

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.