A 1031 exchange intermediary is the independent third party who holds your sale proceeds, takes assignment of your purchase and sale contracts, and closes on the replacement property in your place, which is what lets the IRS treat the transaction as a like-kind exchange rather than a taxable sale. The formal name is qualified intermediary, and using one who meets the requirements of Treasury Regulation ยง 1.1031(k)-1(g)(4) is the safe harbor that keeps the sale proceeds out of your constructive receipt.1eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges Touch the money yourself, even briefly, and the deferral collapses.
What the Intermediary Actually Does
Before your relinquished property closes, you and the intermediary sign a written exchange agreement. The intermediary then takes an assignment of the purchase and sale contract, so for tax purposes they are treated as acquiring the property from you and transferring it to the buyer. At closing, the buyer’s funds wire directly into a restricted account held by the intermediary, not to you. You cannot access, borrow against, or pledge those funds while the intermediary holds them.1eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
When you find your replacement property and go under contract, the intermediary takes an assignment of that contract too, wires the exchange funds to close, and title transfers to you. After closing, the intermediary sends a final accounting showing funds received, interest earned, fees deducted, and disbursements made. You will need those records for IRS Form 8824.2Internal Revenue Service. Instructions for Form 8824 (2025)
This round-trip structure creates the legal fiction that you exchanged one property for another rather than selling one and buying another with the cash. Without it, the IRS views the proceeds as money in your pocket on the day of sale and taxes the gain immediately.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Who Cannot Be Your Intermediary
The regulations define a category of disqualified persons who cannot hold your exchange funds. The most common trap: anyone who has acted as your agent within the past two years. That covers your real estate agent, accountant, attorney, investment broker, or an employee who handled your financial affairs during that window. Someone already working for you is not treated as independent.4Internal Revenue Service. Revenue Procedure 2003-39
The rules also reach family. Your spouse, siblings, parents, and children are barred, as are entities in which you hold more than a 10% ownership stake. Using any disqualified person voids the safe harbor and the proceeds are treated as received on the day of sale.
One exception matters in practice. The two-year lookback does not apply to services provided solely in connection with the exchange itself. A lawyer you have never used before can set up the exchange and serve as the intermediary. A lawyer who prepared your tax return last year cannot.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
How to Vet a Qualified Intermediary
There is no federal licensing requirement for qualified intermediaries. No government agency certifies, audits, or regulates them. Anyone who is not a disqualified person can technically hold your exchange funds. That matters because the intermediary may sit on hundreds of thousands of dollars of your money for months, and if the company fails or mismanages the funds, you can lose both the money and the tax deferral.
Before you sign anything, confirm these protections in writing:
- Segregated accounts under your taxpayer identification number, not commingled with other clients’ money or the intermediary’s operating funds.
- A fidelity bond that would cover you if the company fails or an employee commits fraud, with coverage proportional to the amount you are parking.
- Errors and omissions insurance covering staff mistakes such as a missed deadline or a wire sent to the wrong account.
- Dual-authorization disbursement controls, so no wire goes out without your written authorization plus a second internal sign-off.
Fees for a standard forward exchange typically run $800 to $1,200. Reverse exchanges and build-to-suit arrangements cost significantly more. The fee is small relative to the tax at stake, and price should not drive your choice. Financial stability and fund security matter more.
The Deadlines the Intermediary Enforces
Two firm deadlines govern every exchange, and missing either kills the deferral.
The 45-day identification deadline starts the day your relinquished property closes. By midnight on the 45th day, you must deliver a written notice to your intermediary identifying the specific replacement properties you might buy. Each property must be described unambiguously, typically by street address or legal description. “A rental property in Denver” will not hold up.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
The 180-day exchange deadline requires you to close on your replacement property within 180 days of the sale. There is a trap in it: the actual deadline is the earlier of 180 days or the due date of your federal tax return for the year of sale, including extensions. Sell in October and your April 15 tax deadline arrives before day 180. To keep the full window, file for an automatic extension of your tax return before April 15. Your intermediary will not always remind you.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
The IRS does grant extensions in federally declared disaster areas. If your relinquished or replacement property sits in a county covered by a FEMA disaster declaration, check the IRS disaster relief page for the postponement details.5Internal Revenue Service. Tax Relief in Disaster Situations
How You Identify Replacement Properties
Your written identification is governed by three alternative rules. Pick the wrong one and the entire identification can fail.
- Three-property rule: identify up to three replacement properties regardless of their value. This is the most commonly used approach, and you can close on one, two, or all three.
- 200% rule: identify more than three only if the combined fair market value of everything on the list stays at or below 200% of what you sold the relinquished property for. Exceed the ceiling and the identification fails entirely.
- 95% exception: if the list violates both rules above, the exchange survives only if you actually acquire at least 95% of the total value you identified. In practice this is very hard to satisfy and is a last resort, not a plan.
For most investors the safest path is the three-property rule with a top choice and one or two backups. Once the 45-day window closes, you are locked in. You cannot add properties, swap alternatives, or amend the list.6Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
The Sequence, Step by Step
Missteps in the order of operations create the same problems as a missed deadline.
Before the relinquished property closes, sign the exchange agreement with the intermediary. The intermediary sends a notice of assignment to the title company or escrow agent, informing them that the intermediary has been assigned your rights under the purchase contract. At closing, the buyer’s funds wire directly into the intermediary’s segregated account.3Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Your 45-day identification clock starts the same day. During that window you shop for replacement property and deliver written identification to the intermediary. When you go under contract on a replacement, the intermediary takes an assignment of that contract, notifies the new escrow or title agent, and at closing wires the purchase price from the exchange account to the seller. Title transfers to you. The intermediary then closes out the exchange with the final accounting.
Reverse and Build-to-Suit Variations
Not every deal fits selling first and buying second. Two alternative structures use an affiliate of the intermediary called an Exchange Accommodation Titleholder, and both cost more than a standard forward exchange.
Reverse Exchanges
In a reverse exchange you buy the replacement property before the relinquished property sells. The IRS safe harbor for this structure sits in Revenue Procedure 2000-37 and uses a Qualified Exchange Accommodation Arrangement. The EAT, typically a subsidiary of the intermediary, takes title to whichever property has to be parked. Once the relinquished property sells, the EAT deeds the parked property to you. The 45-day and 180-day deadlines still apply, measured from the date the EAT acquires the parked property.7Internal Revenue Service. Revenue Procedure 2000-37
Build-to-Suit Exchanges
A build-to-suit exchange lets you use exchange funds to construct or renovate the replacement property while the EAT holds title. All construction must be substantially complete within the 180-day period. Labor and materials not incorporated into the real property by day 180 do not count toward exchange value and are treated as taxable boot. To defer the full gain, the improved property must be worth at least as much as the relinquished property when title transfers to you.
Property Eligibility, Boot, and Filing
A few limits shape what the intermediary can do for you.
Only real property held for investment or business use qualifies. The Tax Cuts and Jobs Act of 2017 narrowed Section 1031 to real property, so equipment, vehicles, artwork, and intangibles no longer qualify.8Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Your primary residence does not qualify. U.S. and foreign real property are not like-kind to each other, so a Miami rental cannot be exchanged into a rental in Mexico.6Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
If you do not reinvest every dollar, the shortfall is called boot and it is taxable. Cash boot is any sale proceeds you keep. Mortgage boot is debt relief: if your old loan was $500,000 and your new loan is $350,000, the $150,000 difference is boot even though no cash hit your pocket. Boot is taxed as capital gain, at rates up to 20% plus the 3.8% net investment income tax for higher earners, with a portion potentially taxed at up to 25% for depreciation recapture.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses To avoid boot entirely, buy replacement property at or above the net sale price of the relinquished property and take on debt equal to or greater than the debt relieved.
You must file IRS Form 8824 with your federal return for the year you transferred the relinquished property. It reports the properties, dates, parties, gain deferred, and any boot recognized. Related-party exchanges require Form 8824 for the next two tax years as well.2Internal Revenue Service. Instructions for Form 8824 (2025)
State treatment varies. Most states follow the federal rules, but several impose additional reporting or withholding, particularly when the relinquished and replacement properties sit in different states. Some require non-resident sellers to prepay estimated state income tax or file exchange-tracking forms at closing. If your exchange crosses state lines, get state-specific advice before closing; a fully deferred federal exchange can still trigger a state tax bill.