To become a 1031 exchange qualified intermediary, you form a liability-protected business entity, put the right insurance and segregated escrow arrangements in place, comply with any state licensing rules that apply where your clients hold property, learn the Treasury Regulations governing exchanges well enough to run one without error, and build the referral relationships that generate almost all of the business. There is no federal license to earn and no IRS approval to seek. The barriers are Treasury disqualification rules, a patchwork of state requirements, the cost of proper infrastructure, and the expertise needed to handle six- and seven-figure transactions without blowing a client’s tax deferral.
Since the Tax Cuts and Jobs Act of 2017, Section 1031 exchanges apply only to real property, so your entire practice will revolve around real estate transactions in which owners defer capital gains taxes by swapping one investment property for another.1Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
What the Job Actually Is
A QI holds the sale proceeds from a taxpayer’s relinquished property so the taxpayer never touches the cash. That single function is what preserves the tax deferral. If the taxpayer receives the funds directly, the IRS treats the transaction as a taxable sale.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Operationally, you sign an exchange agreement with the taxpayer, step into the seller’s shoes at closing through a notice of assignment, receive the sale proceeds into a secure account, track the identification and exchange deadlines, and disburse the funds to acquire the replacement property. The agreement must expressly prohibit the taxpayer from receiving, pledging, borrowing, or otherwise accessing the held funds outside of narrow exceptions.3Internal Revenue Service. Revenue Procedure 2003-39
No Federal License, But Check Your State
The IRS does not certify, approve, or supervise 1031 QI firms. It runs a separately named “Qualified Intermediary” program for entities that handle withholding on payments to foreign persons, and that program has nothing to do with 1031 exchanges despite the identical label.
Regulation happens at the state level, and only a minority of states have enacted QI-specific laws. Requirements vary significantly. Some states mandate fidelity bonds, errors and omissions insurance, and registration; others impose nothing. If you plan to serve clients whose property sits in multiple states, research the licensing rules in every state where you will operate before you open the doors.
Who Cannot Serve as a QI
Before you take on your first client, confirm you are not a “disqualified person” as to that taxpayer. The Treasury Regulations bar anyone who has served as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent within the two years before the sale of the relinquished property. The one narrow exception: if the only services those professionals provided were directly related to the exchange itself, they remain eligible.4Internal Revenue Service. Definition of Disqualified Person – TD 8982 Final Regulations
Family members are also disqualified. Spouses, siblings, ancestors, and lineal descendants of the taxpayer cannot serve. Ownership attribution extends the prohibition: if a disqualified person owns more than 10% of an entity, that entity is disqualified too.4Internal Revenue Service. Definition of Disqualified Person – TD 8982 Final Regulations
Banks get a carve-out. A bank as defined in IRC Section 581 is not disqualified merely because it belongs to the same corporate group as a firm that provided investment banking or brokerage services to the taxpayer inside the two-year window. The exception also covers bank affiliates whose primary business is facilitating 1031 exchanges, as long as all of the affiliate’s stock is owned by a bank or a bank holding company.4Internal Revenue Service. Definition of Disqualified Person – TD 8982 Final Regulations This is why so many large QI operations sit inside financial institutions.
If the IRS later determines your firm was a disqualified person as to a client, the client is treated as having had constructive receipt of the sale proceeds from day one, and the entire gain becomes taxable in the year of sale. Experienced QIs include written representations in their exchange agreements confirming no disqualifying prior relationship.
Setting Up the Entity and Insurance
Most QI firms operate as corporations or LLCs. You are holding other people’s money, so personal liability protection is not optional. Beyond entity formation, three layers of coverage are standard.
- Errors and omissions insurance protects against claims arising from administrative mistakes, missed deadlines, or documentation errors. Limits of at least $1 million are standard, though states that regulate QIs may set their own minimums.
- A fidelity bond covers theft or dishonest acts by employees. States that regulate QIs commonly require bonds of $1 million or more, and some allow a qualified escrow account as an alternative.
- Cyber liability insurance addresses wire fraud, which has become one of the highest-risk threats in this industry. A standard E&O policy may not cover losses from a social engineering attack that redirects exchange funds, so dedicated cyber coverage is now a baseline expectation.
How to Hold Client Funds
How you hold client money is the single most important operational decision you make. Keep each client’s exchange proceeds in a segregated, client-specific bank account. Commingling with operating capital or with other clients’ money creates legal exposure and audit problems. Use FDIC-insured depository institutions and remember that FDIC coverage caps at $250,000 per depositor per bank; on larger exchanges you may need to spread funds across multiple institutions to maintain full insurance. Accounts have to stay liquid enough to wire funds to a closing on short notice.
The taxpayer generally cannot access the funds until the earliest of three events: the 180-day exchange period expires, the 45-day identification period expires without the taxpayer identifying a property, or the taxpayer has received all identified replacement properties. Outside those triggers, the only permitted early release involves extraordinary events beyond anyone’s control, such as government condemnation of the replacement property.
Wire Fraud Controls
Every QI should have a written wire verification policy. At minimum it should require verbal confirmation of all wiring instructions at a phone number obtained independently of the email, staff training on phishing identification, verification that bank routing numbers resolve to the expected institution, and immediate confirmation that sent wires arrived at the intended destination. Treat it as a checklist, not a suggestion. The firms that survive a fraud attempt are the ones that ran the checklist.
The Mechanics You Are Being Paid to Run
Two deadlines govern every exchange, and both clocks start when the relinquished property transfers to the buyer. The taxpayer has 45 days to deliver a signed, written list of potential replacement properties to you. There are no extensions and no exceptions for weekends or holidays. The taxpayer then has until the earlier of 180 days after the sale or the due date (with extensions) of their income tax return for the year of sale to actually receive the replacement property.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 That second trigger catches people: a taxpayer who sells in October and does not file an extension can face a mid-April deadline instead of a full 180 days.
Build systems that make missing these dates nearly impossible. Automated calendar alerts, multiple notification methods to the taxpayer, and a tracking system covering every open exchange are basic requirements. One missed deadline and the taxpayer’s gain becomes fully taxable.
The taxpayer’s identification of replacement properties must follow one of three rules, and you need to know them well enough to flag problems before day 45. Under the three-property rule the taxpayer can identify up to three properties regardless of value. Under the 200% rule, if more than three are identified, their combined fair market value cannot exceed 200% of the relinquished property’s value. Under the 95% rule, an identification that busts both prior rules only saves the exchange if the taxpayer actually acquires at least 95% of the aggregate value of everything identified. Violating these limits is treated as if nothing was identified, which kills the exchange. A QI who accepts an identification list without checking these limits is not doing the job.
You also need to understand boot. When the replacement property costs less than the relinquished property, or the taxpayer takes on less debt than they shed, the difference is taxable. Cash boot is leftover proceeds after purchase. Mortgage boot arises when debt on the replacement property is lower than debt on the relinquished property, even if no cash changes hands. You are not the client’s tax advisor, but your exchange agreement should clearly address how excess proceeds are handled and when, if ever, they can be released.
When an Exchange Fails
Exchanges fail for predictable reasons: no suitable replacement inside 45 days, a deal that collapses before day 180, financing that falls apart. If the 45-day deadline passes without a valid identification, the exchange is dead immediately, but under the constructive receipt restrictions you generally cannot hand back the funds until day 180. Spell out in the exchange agreement the exact circumstances under which funds are released and the timeline for doing so. Clients who have just lost an exchange are stressed and often angry, and documented procedure protects both sides.
Reverse Exchanges
In a standard deferred exchange the taxpayer sells first and buys second. A reverse exchange flips the sequence, usually because a deal on the replacement property will not wait. Reverse exchanges are governed by Revenue Procedure 2000-37, which provides a safe harbor using an exchange accommodation titleholder that parks title to one property for up to 180 days while the taxpayer completes the other leg.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 They are substantially more complex and carry higher risk. Many QI firms offer these as a premium service, and some newer firms wait until they have sufficient experience and capitalization before taking them on.
Reporting
The taxpayer uses your final accounting statement to complete IRS Form 8824, filed with their tax return for the year the relinquished property was transferred.5Internal Revenue Service. Instructions for Form 8824 Your statement needs to clearly show all receipts, disbursements, and dates. If the funds earn interest while in escrow, you must issue a Form 1099-INT to the taxpayer for any interest of $10 or more.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID Whether interest accrues to the taxpayer or to you depends on the exchange agreement, and that allocation is one of the core business decisions you will make.
Voluntary Credentialing
The Federation of Exchange Accommodators is the primary trade organization for the 1031 exchange industry. It maintains a code of ethics, advocates for industry standards, and offers the Certified Exchange Specialist (CES®) designation, which requires an application, examination, and ongoing continuing education. The credential is voluntary but it signals baseline competence to clients and referral partners. For someone entering the industry without an established reputation, it is a meaningful competitive advantage.
How the Business Makes Money
Revenue comes from two streams. The first is a flat administrative fee per exchange, typically $600 to $1,200 for a standard deferred exchange, with additional fees of $200 to $400 for each replacement property beyond the first. Reverse and improvement exchanges command higher fees because they are more complex.
The second is interest earned on funds held during the exchange period, and this is where the real money is. Industry estimates suggest roughly two-thirds of a QI firm’s revenue comes from interest on held funds rather than administrative fees. How you split interest with the taxpayer is a strategic choice: some firms charge lower fees and retain more interest, others charge higher fees and pass more interest through. Whatever you decide, disclose it clearly in the exchange agreement. Profitability tracks both interest rates and volume: when rates are low, the business leans on fees; when rates are high, a single large exchange sitting in escrow for five months can generate meaningful income.
Where Clients Come From
QI work is almost entirely referral-driven. Real estate brokers, tax attorneys, CPAs, and financial advisors are the primary sources. The taxpayer usually does not know they need a QI until one of those professionals says so. The selling point to referral partners is not price, it is competence and security, because they are putting their own reputation on the line when they send a client your way. They want to see proper insurance, segregated accounts, clear procedures, and ideally the CES® designation.
In a field with no federal oversight, the firms that last are the ones that voluntarily hold themselves to the highest standard on fund security, documentation, and deadline management. That standard is what you are actually building when you set up a QI practice.