How to Choose a Solid Qualified Intermediary
Every 1031 exchange requires a Qualified Intermediary. The IRS mandates it. If you attempt to touch the sale proceeds yourself, even for a single day, the exchange fails and the full capital gain becomes immediately taxable. The QI holds your money, executes the legal transfer, and releases the funds when your replacement property is ready to close.
That is a significant amount of trust to place in an entity that is almost entirely unregulated at the federal level.
Unlike attorneys, CPAs, or broker-dealers, Qualified Intermediaries are not licensed by the federal government. A handful of states regulate QIs, California, Idaho, Maine, Nevada, Oregon, Virginia, and Washington, but most states have no requirement beyond a business registration. Anyone can legally form a QI company tomorrow and begin holding investor funds.
This is not a hypothetical risk. QI fraud and insolvency events have occurred. Investors have lost exchange funds, failed their exchanges involuntarily, and paid tax bills they had spent years deferring. The risks are real, known, and avoidable with proper diligence.
What a Qualified Intermediary Actually Does
Before you can evaluate a QI, you need to understand what they actually do, and what they do not do.
When your relinquished property closes, the proceeds go directly to the QI, not to you. The QI holds those funds in a separate escrow or trust account and cannot commingle them with operating capital. When you identify and close on your replacement property, the QI releases the funds to complete the transaction.
The QI also prepares the legal documentation that makes the exchange valid, the exchange agreement, the assignment of your purchase and sale contracts, and the instructions to close. A QI that cannot produce clean documentation, or that uses boilerplate it cannot explain, is a risk you do not need to take.
The Five Things to Verify Before Signing a QI Agreement
Fidelity bond and errors-and-omissions insurance: A fidelity bond protects against employee theft. E&O insurance covers professional mistakes. Both matter because a QI's failure can be caused by either. Ask for the policy carrier, the coverage limit, and the policy number. Verify independently that the policy is active.
Separate, segregated accounts: Exchange funds should never be commingled with a QI's operating capital. Ask whether funds are held in a segregated trust or escrow account in your name or for your benefit. Get the answer in writing.
Years in business and transaction volume: There is no minimum experience requirement, which is exactly the problem. A QI handling your exchange should be able to demonstrate a track record. Ask how many exchanges they have facilitated and how many simultaneous exchanges they currently hold.
No disqualified person relationship: You cannot use an attorney, CPA, financial advisor, or real estate agent who has worked for you in the past two years as your QI. The IRS defines these as disqualified persons. Using a disqualified person voids the exchange immediately.
State registration where required: If your exchange involves property in California, Idaho, Maine, Nevada, Oregon, Virginia, or Washington, verify that your QI is registered in that state. Some require registration, bonding, and annual filings. Operating without required registration is a red flag.
What to Read in the QI Agreement
Most investors sign QI agreements without reading them. This is a mistake. The agreement is a legal contract that governs how your money is held, when it can be released, and what happens if something goes wrong. Three specific clauses require your attention.
What happens to interest earned on your funds: Some QIs keep the interest. Others pass it back to you. The agreement specifies this. If the QI keeps your interest, that is compensation you are not seeing in the quoted fee. On a large exchange held for 180 days, this can be significant.
What triggers a release of funds: The agreement should specify that funds are released only upon your written instruction, only to the title company or escrow, and only for a property you have identified. Any agreement that allows the QI to release funds on its own discretion is dangerous.
Dispute resolution and governing law: If something goes wrong, the agreement tells you how it will be resolved. Arbitration clauses, forum selection, and limitation-of-liability provisions all matter. Have your attorney review this section.
Common QI Mistakes That End Exchanges
The exchange agreement must be signed before the relinquished property closes. This is the most common QI mistake. If you close on your sale before signing the exchange agreement, the exchange is invalid. The QI must be in place, and the contract assignment must be executed, before the deed transfers.
The identification notice must go to the right party. Your 45-day identification letter must be delivered to the QI, not to the seller, broker, or title company. Using the wrong recipient means your identification is legally invalid, even if it was delivered on time.
Constructive receipt. If you have the ability to access the exchange funds, even if you do not actually access them, the IRS may treat it as receipt. A QI agreement with provisions that allow the investor to direct or access funds outside of normal exchange procedures creates constructive receipt. This is why the agreement language matters.
What to Ask When Interviewing a QI
Beyond the verification items above, there are direct questions that reveal how a QI operates. Ask: How are exchange funds held and in what type of account? Who can authorize a release of funds? What is your process if I miss my 45-day deadline? How long have you been in operation? How many exchanges do you currently hold?
A QI that is reluctant to answer these questions directly is a QI worth avoiding. The best QIs are transparent about their operations because they have nothing to hide. Vague or defensive answers are a meaningful data point.
The Bottom Line
Your QI holds the legal and financial infrastructure of your exchange. A weak QI does not just create risk, it creates risk you often cannot see until it is too late. The fee difference between a well-capitalized, insured QI and a cut-rate one is typically a few hundred dollars. The downside of choosing wrong is your entire tax deferral.
The cheapest QI fee is not the goal. A QI you can verify, trust, and reach when something comes up is worth every dollar of the difference.
Ready to talk through your exchange and get matched with a qualified intermediary? Talk to a Specialist, no pitch, no pressure, just straight answers.
