Qualified Intermediary Basics
A qualified intermediary is a core part of most deferred exchanges. Understanding what a QI does—and choosing the right one—is essential for a successful 1031 exchange.
Key Takeaways
- A qualified intermediary (QI) is an independent third party that facilitates your 1031 exchange.
- The QI holds your exchange funds so you never have "actual or constructive receipt" of the proceeds.
- You must engage a QI before closing on the sale of your relinquished property.
- The QI receives your property identification and uses the funds to acquire your replacement property.
- Choosing a reputable, experienced QI with proper insurance and fund security is critical.
What is a Qualified Intermediary?
A qualified intermediary (QI)—sometimes called an "exchange accommodator" or "facilitator"—is an independent third party that plays a central role in a 1031 exchange. The QI's primary function is to hold the proceeds from the sale of your relinquished property and then use those funds to acquire your replacement property.
The IRS requires the use of a QI to create what is known as a "safe harbor" for the exchange. Without a QI (or another acceptable exchange structure), you would be deemed to have received the sale proceeds, triggering immediate taxation of your capital gain.
The QI cannot be a person or entity that has acted as your agent within the past two years. This means your real estate agent, attorney, accountant, or financial professional typically cannot serve as your QI.
Why the QI Matters
The QI matters because the IRS has strict rules about "actual or constructive receipt" of exchange funds. If you, as the taxpayer, receive the proceeds from your property sale—even briefly—the exchange fails, and you owe capital gains tax on the full gain.
The QI serves as a firewall. By holding the funds, the QI ensures that you never have control over the money during the exchange period. This preserves the tax-deferred nature of the transaction.
Beyond holding funds, the QI also:
- Prepares and executes the exchange documentation
- Receives your formal property identification
- Coordinates with title companies, closing agents, and other parties
- Transfers funds to acquire your replacement property on schedule
What a QI Does During the Exchange
Here is a typical timeline of the QI's involvement in a standard 1031 exchange:
Before Sale Closes
- Prepares the Exchange Agreement with the taxpayer
- Reviews the sale contract and coordinates with the closing agent
- Ensures exchange documents are properly assigned
At Sale Closing
- Receives the net sale proceeds directly from the closing agent
- Deposits funds into a secure, segregated account
- Provides confirmation of funds received
45-Day Identification Period
- Receives and acknowledges your written property identification
- Confirms the identification was timely submitted
- Keeps records of all identified properties
Replacement Property Acquisition
- Coordinates with the closing agent for the replacement property
- Transfers exchange funds to complete the purchase
- Documents the acquisition as part of the exchange
After Exchange Completes
- Provides a final accounting statement
- Supplies documentation for your tax return (Form 8824)
- Releases any remaining funds (which may be taxable as "boot")
Why the Taxpayer Cannot Simply Hold the Proceeds
The fundamental rule of a 1031 exchange is that you cannot have "actual or constructive receipt" of the exchange funds. This rule exists because the IRS views the transaction as a property swap, not a sale followed by a purchase.
If you receive the money—even if you intend to use it to buy replacement property—you have effectively sold your property and received cash. That cash is taxable.
The QI solves this problem by stepping into the transaction. Legally, the QI acquires your relinquished property (via assignment) and then acquires the replacement property for you. The funds flow through the QI, never touching your hands.
Critical Rule
Questions to Ask Before Choosing a QI
Choosing a QI is an important decision. The QI will hold potentially substantial funds on your behalf, so you want to ensure they are reputable, experienced, and financially secure.
How long have you been in business, and how many exchanges have you facilitated?
Experience matters. A QI with a long track record has seen various scenarios and knows how to handle complications.
How are exchange funds held and protected?
Funds should be held in segregated, FDIC-insured accounts. Ask if they use a qualified escrow or trust account.
What insurance or bonding do you carry?
Errors and omissions insurance, fidelity bonds, and other coverage protect you if something goes wrong.
Can I earn interest on my exchange funds?
Some QIs offer interest-bearing accounts. Note that interest earned may be taxable.
What is your fee structure?
Understand all fees upfront, including base fees, wire transfer fees, and any additional charges.
Who will be my primary contact during the exchange?
Having a dedicated contact ensures continuity and responsiveness throughout the process.
What happens if the company is acquired or goes out of business?
Understanding contingency plans gives you confidence that your funds are protected.
Common Misunderstandings
I can set up the QI after my sale closes
The QI must be in place before you close on the sale. The exchange documents must be signed and the QI must be ready to receive the proceeds at closing.
My attorney can serve as my QI
If your attorney has provided services to you within the past two years, they are disqualified. The same applies to your accountant, real estate agent, or financial professional.
All QIs are the same
QIs vary significantly in experience, fund security practices, insurance coverage, and service quality. Due diligence is important.
The QI gives tax or legal advice
QIs facilitate the exchange mechanics but do not provide tax, legal, or investment advice. You should consult your own financial professionals.
I can access my exchange funds if I need them
Exchange funds are locked. If you withdraw them before completing the exchange, you trigger a taxable event.
Related Resources
Continue your research with these related guides and tools.
Complete 1031 Exchange Guide
The comprehensive guide covering all aspects of 1031 exchanges.
Read moreTiming45-Day & 180-Day Deadlines
Understand the timing rules that govern your exchange.
Read moreProcessIdentifying Replacement Property
Learn the formal rules for identifying replacement properties.
Read moreFAQ1031 Exchange FAQ
Answers to common questions about exchanges and QIs.
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This information is educational only and should not be relied upon as tax, legal, or investment advice. All investments involve risk including loss of principal.