What Is a Qualified Intermediary in a 1031 Exchange?

A qualified intermediary in a 1031 exchange is an independent third party who holds the proceeds from the sale of your relinquished property, then uses those funds to acquire your replacement property, so that you never take possession of the cash. That structure is what allows the transaction to qualify for tax deferral under Internal Revenue Code Section 1031, postponing federal capital gains taxes of 15% or 20% — along with the 3.8% net investment income tax that applies to many real estate investors — until you eventually sell the replacement property outside of another exchange.

What the Intermediary Actually Does

Once you sign an exchange agreement with the intermediary, they coordinate with the escrow or title company handling your sale. They provide assignment instructions and notify the other parties that the transaction is part of a 1031 exchange. When the sale closes, the title company wires the net proceeds directly to the intermediary’s escrow account. The money never passes through your hands.

The intermediary then holds those funds until you identify a replacement property and sign a purchase agreement on it. At closing on the new property, the intermediary uses the held funds to acquire it and transfer it to you.

The entire point of this arrangement is to keep you from having what the IRS calls “constructive receipt” of the sale proceeds. You cannot control, access, pledge, borrow against, or benefit from the cash at any point while it is in the intermediary’s hands. If you gain control over the funds even briefly, the exchange fails and the full capital gains tax comes due.¹

Who Can and Cannot Serve as Your Intermediary

Treasury Regulation Section 1.1031(k)-1(g)(4) sets strict independence rules. Your intermediary cannot be a “disqualified person,” which the regulation defines as anyone who has acted as your agent during the two years before the exchange begins.¹ That two-year lookback rules out your attorney, your accountant, your real estate broker, and any of your employees.

The restriction extends to related entities. If you or any of those disqualified agents owns more than 10% of a company, that company cannot serve as the intermediary either.¹ Because of these rules, most qualified intermediaries are specialized firms whose only business is facilitating exchanges, with no prior relationship to the taxpayer.

The Exchange Agreement Must Come First

The written exchange agreement between you and the intermediary has to be signed before the sale of your relinquished property closes. That document is what creates the safe harbor. Without it, the intermediary’s involvement has no legal effect for tax purposes.¹

The agreement must contain language that explicitly prevents you from receiving, pledging, borrowing, or otherwise accessing the exchange funds while the intermediary holds them. It typically identifies the relinquished property, the anticipated closing date, the estimated sale price, and your tax identification number. Both parties sign before the property transfers to the buyer. Close the sale without this agreement in place and the transaction is a regular taxable sale.

Fees for qualified intermediary services generally range from $750 to $1,500, depending on the complexity of the exchange.

The Deadlines Your Intermediary Tracks

Federal law imposes two firm deadlines on every deferred 1031 exchange, and the qualified intermediary monitors both.

The 45-day identification period starts the day the relinquished property sale closes. You have exactly 45 calendar days to identify potential replacement properties in writing, signed and delivered to the intermediary or another party involved in the exchange other than your own agent. Notice to your attorney, accountant, or real estate agent does not count.²

The 180-day exchange period runs from that same closing date. The replacement property must be received and the exchange completed within 180 days, or by the due date (with extensions) of your income tax return for the year of the sale, whichever comes first.² The “whichever is earlier” rule catches many taxpayers off guard. Sell a property in October with a tax return due the following April, and you may have fewer than 180 days to close on the replacement. Filing a tax return extension pushes the due date back and can restore the full 180-day window.

Neither deadline can be extended for any reason except a presidentially declared disaster.² Missing either one, even by a single day, causes the entire exchange to fail.

How You Identify Replacement Property to the Intermediary

Your written identification, delivered to the intermediary within 45 days, has to comply with one of three rules. They are mutually exclusive; you use whichever fits your situation.

Three-property rule. You may identify up to three replacement properties of any value. You can ultimately purchase one, two, or all three. Most exchangers use this rule because it is straightforward and provides a backup if one deal falls through.
200-percent rule. If you want to identify more than three properties, you may do so as long as the combined fair market value of all identified properties does not exceed 200% of the fair market value of the relinquished property.
95-percent rule. If your identified properties exceed both the three-property limit and the 200% cap, the exchange survives only if you actually acquire at least 95% of the total value of everything you identified.

Failing to comply with the applicable rule means the IRS treats you as having identified no replacement property at all, and the exchange collapses.

Protecting Your Funds While the Intermediary Holds Them

Qualified intermediaries are not federally regulated. No federal agency licenses or oversees them. A handful of states require registration, fidelity bonds, or proof of solvency, but most states impose no requirements at all. The safety of your exchange funds depends almost entirely on the firm you choose.

When evaluating a qualified intermediary, ask about these protections:

Segregated accounts. Your funds should be held in a separate account, not commingled with the intermediary’s operating funds or other clients’ money.
Fidelity bond. This protects against losses caused by the intermediary’s dishonest acts, such as fraud or embezzlement.
Errors and omissions insurance. This coverage protects against losses caused by negligence or mistakes in handling the exchange.
FDIC-insured accounts. Exchange funds deposited in FDIC-insured bank accounts receive the standard deposit insurance protection.

Because there is no federal backstop, choosing an unqualified or dishonest intermediary can mean total loss of your exchange funds. Research the firm’s track record, financial stability, and insurance coverage before signing the exchange agreement.

Boot, Reverse Exchanges, and Reporting

A few adjacent points touch the intermediary’s role without being the intermediary question itself.

If your replacement property costs less than the relinquished property, or you take on a smaller mortgage, the difference is “boot” and it is taxable in the year of the exchange even though the rest of the transaction qualifies for deferral. Under Section 1031(b), the recognized gain is limited to the amount of money and the fair market value of other non-like-kind property received.³ To defer the entire gain, you generally need to reinvest all the sale proceeds into the replacement property and take on equal or greater debt. Your intermediary can help structure the numbers; a tax advisor should review the details.

If the right replacement property appears before you have sold the property you want to relinquish, a reverse exchange is possible. Under IRS Revenue Procedure 2000-37, an “exchange accommodation titleholder,” a separate entity from your qualified intermediary, takes title to either the replacement or the relinquished property and parks it until the exchange can be completed.⁴ The parked property must be transferred within 180 days, and the 45-day identification requirement still applies. Reverse exchanges are more complex and expensive than standard forward exchanges because of the additional entity and, often, bridge financing.

Every completed exchange must be reported to the IRS on Form 8824, Like-Kind Exchanges, filed with your tax return for the year in which you transferred the relinquished property.⁵ The form asks you to describe both properties, report the transfer and identification dates, calculate any recognized gain from boot, and determine the tax basis of the replacement property.⁶ If a related party was involved, you also file Form 8824 for the two years after the exchange year.

One last point worth remembering as you set up the exchange. Section 1031 defers the capital gains tax, it does not eliminate it. The replacement property carries over the tax basis of the relinquished property, adjusted for any boot received, so the deferred gain rides along with the new property.³ When you eventually sell without doing another exchange, the full accumulated gain becomes taxable, potentially including the 3.8% net investment income tax on top of the capital gains rate.⁷

1
GovInfo. 26 CFR 1.1031(k)-1 Treatment of Deferred Exchanges
2
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
3
Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment
4
Internal Revenue Service. Revenue Procedure 2000-37
5
Internal Revenue Service. About Form 8824, Like-Kind Exchanges
6
Internal Revenue Service. 2025 Instructions for Form 8824
7
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax