How to Become a Qualified Intermediary for 1031 Exchanges

To become a qualified intermediary for 1031 exchanges, you form a business entity, confirm you meet the federal eligibility rules under Treasury Regulation 1.1031(k)-1, register in any state that licenses exchange facilitators, secure errors-and-omissions insurance and a surety bond, open segregated escrow or trust accounts that satisfy the IRS safe harbors, and build a written data-security program under the FTC Safeguards Rule. No single federal license exists for the role. What governs the business is a combination of IRS rules, state registration statutes in several jurisdictions, and federal data-security law — plus the exchange mechanics you will be paid to enforce for every client.

Form the Entity and Get an EIN

Start by filing organizational documents with your state’s Secretary of State to create an LLC or corporation. Filing fees generally range from $50 to $500 depending on the state. Once the entity is recognized, apply online for a federal Employer Identification Number through the IRS. The EIN is free, issued immediately, and required for tax reporting and for opening the specialized bank accounts you will need to hold client funds.¹

Even in states without specific rules for exchange facilitators, you still need to keep the entity in good standing. That means filing annual reports and paying any franchise taxes or administrative fees the state imposes on ordinary businesses.

Check Whether Your State Licenses Exchange Facilitators

Several states have enacted laws that regulate exchange facilitators directly and require registration or licensing before you can operate. Those states typically require proof of errors-and-omissions insurance and a surety bond, along with an application fee that runs from a few hundred dollars up to roughly $1,000. Renewals are usually annual or every two years.

Confirm with your state’s regulatory agency whether these rules apply to you before you take on any clients or start marketing. Operating without a required license is the fastest way to lose the business before it starts.

Buy Insurance and Post a Surety Bond

Errors-and-omissions coverage protects your business when a mistake in handling an exchange causes a client financial harm. Policy limits commonly start at $1 million. Annual premiums for a policy at that level generally run from a few hundred to a few thousand dollars, depending on your transaction volume and claims history. No federal law requires E&O coverage, but several states mandate it for exchange facilitators, and any careful client or client’s attorney will ask for a certificate of insurance before handing over sale proceeds.

A surety bond adds a separate layer of protection by guaranteeing recovery if you mishandle client funds. Bond amounts scale with transaction volume and can range from $500,000 to several million dollars. The premium you pay is a fraction of the face value, often 1 to 5 percent for well-qualified applicants. Together, insurance and bonding are the credibility floor in a field with no federal regulator and transactions that routinely involve hundreds of thousands or millions of dollars.

Open Escrow or Trust Accounts That Meet the Safe Harbor

Preventing the taxpayer from having access to sale proceeds during the exchange period is one of your core legal duties. If the taxpayer can receive, pledge, borrow, or otherwise benefit from the funds before the exchange closes, the IRS treats the taxpayer as being in constructive receipt of the money and the tax deferral collapses.²

The regulations provide two safe-harbor structures for holding the proceeds: a qualified escrow account or a qualified trust. In both, the holder cannot be the taxpayer or a disqualified person, and the governing agreement must expressly limit the taxpayer’s access to the funds. An ordinary bank account the taxpayer can draw on does not qualify.²

Your exchange agreement must state that the taxpayer has no right to receive, pledge, borrow, or otherwise benefit from the funds until the exchange period ends. The narrow exceptions the regulations permit are for funds released after the 45-day identification period if no property was identified, after all replacement property has been received, or on a material contingency beyond anyone’s control that is spelled out in the agreement.²

Segregate Client Funds

Federal rules allow you to hold multiple clients’ funds in a master account for investment purposes, but only if each taxpayer’s share is tracked through identifiable sub-accounts at a depository institution. Each sub-account must be identified by the taxpayer’s name and tax identification number, and the institution must credit earnings to each sub-account separately. Earnings allocable to a taxpayer’s exchange funds must be paid or credited to that taxpayer on a pro-rata basis using a reasonable method that accounts for time, rate of return, and account balances.³

The stronger practice is to hold each client’s funds in a separately titled, FDIC-insured account labeled for the benefit of that specific client. In a well-known bankruptcy involving a large exchange facilitator, investors whose funds sat in a commingled pool were treated as unsecured creditors, while investors with funds in individually segregated “for the benefit of” accounts had a much stronger claim to recovery. Segregation builds client trust and reduces your legal exposure at the same time.

Confirm You Are Not a Disqualified Person

Before you accept any client, screen the relationship. A qualified intermediary is defined by regulation as a person or entity that enters into a written exchange agreement with the taxpayer to acquire and transfer the relinquished property, then acquire and deliver the replacement property. That arrangement creates the safe harbor that keeps the taxpayer from being treated as receiving the proceeds directly.² It only works if you are not a “disqualified person” to that taxpayer.

You are disqualified if, within the two years before the exchange, you acted for the taxpayer as an employee, attorney, accountant, investment banker or broker, or real estate agent or broker. Prior work as an intermediary on a previous 1031 exchange for the same taxpayer does not disqualify you, and routine financial, title insurance, escrow, or trust services also do not count.²

Family relationships trigger disqualification too. The regulation borrows the related-person definitions from the tax code, which cover brothers and sisters (including half-siblings), a spouse, ancestors, and lineal descendants.⁴ Any entity in which the taxpayer holds more than 10 percent of the stock or capital interest is also disqualified.² If a disqualified person serves as intermediary, the entire exchange fails and the taxpayer owes tax on the sale immediately.

Build a Written Data-Security Program

You will collect Social Security numbers, tax identification numbers, and bank account information, which pulls your business under the FTC Safeguards Rule. The rule applies to financial institutions under the Gramm-Leach-Bliley Act, a category defined by the financial nature of the activity rather than by industry name. Exchange facilitators are not called out by name, but holding and transferring large sums tied to financial transactions fits within the covered activities.⁵

The rule requires a written information-security program with specific elements:

Designate a qualified individual to implement and oversee the program.
Conduct a written risk assessment of foreseeable internal and external threats, and update it periodically.
Encrypt customer information in storage and in transmission.
Use multi-factor authentication for anyone accessing customer data.
Test safeguards through annual penetration testing and vulnerability scans every six months, unless you use continuous monitoring instead.
Dispose of customer information no later than two years after you last used it to serve the client, unless a legal or business need requires keeping it longer.
Maintain a written incident response plan.
Notify the FTC no later than 30 days after discovering a qualifying data breach.

Staff security training and oversight of any third-party service providers who touch client data are also required.⁵

Learn the Exchange Rules You Will Enforce

The administrative setup is only half the job. On every deferred exchange, you enforce two firm deadlines. The taxpayer has 45 days after transferring the relinquished property to identify potential replacement properties in writing. The exchange must be completed — the replacement property actually received — within 180 days of the transfer or by the due date of the taxpayer’s return for that year, whichever comes first.⁶ Missing either deadline disqualifies the transaction.

Within the 45-day window, the identification has to satisfy one of three rules:

The three-property rule: up to three replacement properties, regardless of value.
The 200-percent rule: any number of properties, so long as their combined fair market value does not exceed 200 percent of the total value of the relinquished properties.
The 95-percent rule: if the taxpayer identifies more than either of the above allows, the identification is treated as nothing identified unless the taxpayer actually acquires at least 95 percent of the combined value of the identified properties before the exchange period ends.²

You also need to recognize and structure around boot. When a taxpayer receives cash or non-like-kind property as part of the deal, that portion is taxable even if the rest of the exchange qualifies for deferral.⁷ Leftover cash after the replacement property is bought creates boot. So does debt relief: if the mortgage on the replacement property is smaller than the mortgage on the relinquished property, the difference counts as cash received. Explaining these mechanics and coordinating with each client’s tax advisor are part of the service.

Some clients will want to acquire the replacement property before selling the old one. In that reverse-exchange structure, an exchange accommodation titleholder — often the same company acting as QI — takes title to one property under a qualified exchange accommodation arrangement. The IRS safe harbor requires the entire exchange to be completed within 180 days, and acting as accommodation titleholder does not disqualify you from serving as QI for the same taxpayer later.⁸

Handle IRS Reporting

Acting as QI shifts reporting responsibilities that would otherwise sit with the closing agent onto you. When the relinquished property is sold, you may need to file Form 1099-S reporting gross proceeds. If the exchange closes with no cash paid to the taxpayer, you report zero in the gross proceeds box and check the like-kind exchange indicator. The taxpayer’s Form W-9 supplies the name and taxpayer identification number that feed your reporting.⁹

Your clients file Form 8824 with their own returns for the year of the exchange, and they rely on you for the transfer and receipt dates, the identification of replacement property, and any boot received.¹⁰ Interest earned on funds held in escrow or trust is attributed to the taxpayer, not to you, even when the funds sit in a commingled master account. You track that interest and make sure it is allocated and reported on the taxpayer’s behalf.³

What Is at Stake if You Get It Wrong

When an exchange fails because of an ineligible intermediary, a missed deadline, or a botched identification, the IRS treats the taxpayer as having sold the property outright. Long-term capital gains hit at 15 or 20 percent depending on income, with the 20-percent rate starting at roughly $545,500 for single filers and $613,700 for married couples filing jointly in 2026.¹¹ Any gain attributable to previously claimed depreciation is taxed at a maximum 25-percent recapture rate. Taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) also owe the 3.8-percent net investment income tax on the gain, and those thresholds are not adjusted for inflation.¹² Stacked together, a failed exchange can easily cost a client 30 percent or more of the gain in combined federal taxes. That is the risk clients hire you to prevent, and it is why every piece of the setup above matters.

1
Internal Revenue Service. Get an Employer Identification Number
2
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
3
eCFR. 26 CFR 1.468B-6 – Escrow Accounts, Trusts, and Other Funds Used During Deferred Exchanges
4
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
5
Federal Trade Commission. FTC Safeguards Rule: What Your Business Needs to Know
6
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
7
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
8
Internal Revenue Service. Revenue Procedure 2000-37
9
Internal Revenue Service. Instructions for Form 1099-S
10
Internal Revenue Service. Instructions for Form 8824
11
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
12
Internal Revenue Service. Topic No. 559, Net Investment Income Tax