Who Is a Qualified Intermediary for a 1031 Exchange?

A qualified intermediary for a 1031 exchange is an independent third party who holds your sale proceeds, handles the exchange paperwork, and transfers the replacement property to you, so you never take direct receipt of the cash between the two closings. That separation is the whole point. If the money lands in your account, even for a moment, the IRS treats the sale as taxable and the deferral is gone. Federal regulations spell out who qualifies, who is barred, and what the intermediary must do in writing to keep the exchange intact.

What a Qualified Intermediary Does

Treasury Regulation Section 1.1031(k)-1(g)(4) creates a safe harbor that shields you from being treated as though you received the sale proceeds. Under that safe harbor, the QI is not considered your agent for purposes of Section 1031. The regulation defines a qualified intermediary as a person who is not the taxpayer and is not a disqualified person, and who enters into a written exchange agreement obligating them to acquire the relinquished property from you, transfer it to the buyer, acquire the replacement property, and transfer it back to you.1eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges

In practice, the QI doesn’t show up at closing or take physical control of the property. The intermediary’s contract rights are assigned into the sale and purchase agreements, and title passes directly between the parties. What matters is that the money routes through the QI’s escrow or trust account and never reaches your bank account.

The exchange agreement itself must expressly limit your rights to receive, pledge, borrow, or otherwise benefit from the funds the QI holds. That restriction is what prevents constructive receipt, the IRS doctrine that treats money you could have grabbed as money you did grab. Without those contractual guardrails, the safe harbor collapses and you owe tax on the full gain from the sale.1eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges

Who Cannot Serve as Your Qualified Intermediary

Treasury Regulation Section 1.1031(k)-1(k) draws hard lines around who counts as a disqualified person. If a disqualified person handles the exchange, the safe harbor vanishes and the IRS treats the transaction as a plain sale followed by a purchase, fully taxable.

The following people and entities are disqualified:

  • Anyone who has acted as your attorney, accountant, investment banker, or real estate broker within the two years before the property transfer. The two-year lookback applies even if the past work had nothing to do with real estate.
  • Close family members, including your spouse, siblings, parents, grandparents, children, and grandchildren.
  • Any corporation, LLC, or partnership in which you hold more than a 10% ownership interest, and any entity that is related to you under the related-party rules of the tax code.

One carve-out matters. Routine financial, title insurance, escrow, or trust services do not trigger the two-year disqualification. A title company that handled your last closing, or a bank where you keep accounts, can still serve as your QI or run a QI subsidiary.2Internal Revenue Service. Definition of Disqualified Person for Section 1031 Exchanges Someone whose only prior work for you was facilitating a previous 1031 exchange is also not disqualified by that service alone.

Experienced investors still trip on this. The very familiarity that makes your CPA or attorney helpful in planning is exactly what makes them disqualified from executing the exchange. Use your advisor to plan; hire a separate, independent QI to run it.

The Deadlines Your Intermediary Must Help You Hit

Two non-negotiable deadlines govern every deferred 1031 exchange, and your QI cannot extend them. Both start the day you close on the relinquished property.

A QI who lets you drift past day 45 has let your exchange die. Responsiveness is not a soft factor when choosing one.

How the Money and Paperwork Flow

A standard deferred exchange follows a specific sequence, and every step must happen in order:

  • Sign the exchange agreement before you close on the sale of the relinquished property. It spells out the QI’s obligations, restricts your access to the funds, and establishes your intent to complete a tax-deferred exchange. Signing after closing is too late and typically kills the exchange.
  • Assign your rights under the sale contract to the QI and notify the buyer in writing. The buyer still gets the property and still pays the agreed price; the assignment means the QI, not you, receives the proceeds.
  • At closing, the purchase funds flow directly into a qualified escrow or trust account controlled by the QI. You never see the money in your own account.
  • Within 45 days, you deliver your written identification of the replacement property to the QI.
  • Within 180 days, the QI uses the held funds to acquire the replacement property and transfer it to you.

Not every closing cost can be paid from exchange funds. Expenses directly tied to the transaction, such as real estate commissions, title insurance, escrow fees, and recording fees, are generally qualified exchange expenses and can come out of the proceeds. Loan origination fees, property insurance premiums, prorated property taxes, and inspection costs are not exchange expenses. Paying them out of the QI-held funds can create taxable boot.4Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 A good QI will flag that before closing, but the responsibility lands on you and your tax advisor.

What a Qualified Intermediary Costs

QI fees for a straightforward forward exchange generally run between $600 and $1,200 for the base service. More complex transactions, such as reverse exchanges, improvement exchanges, or exchanges involving multiple relinquished or replacement properties, can push fees into the $3,000 to $8,500 range. On top of the base fee, expect minor charges for wire transfers, courier services, and document preparation.

These fees are a qualified exchange expense and can be paid from the exchange proceeds without creating boot. The lowest quote is rarely the right basis for a decision. An intermediary who mishandles a deadline or commingles funds can cost you far more than the few hundred dollars you saved.

Protecting Your Exchange Funds

When you hand six or seven figures to a QI, the safety of those funds becomes a real concern. Money in the QI’s account is not FDIC-insured by default, and if the QI goes bankrupt, your funds can be frozen in bankruptcy proceedings. That scenario produces the worst of both outcomes: a failed exchange triggering a tax bill in the year of sale, with the cash itself tied up and potentially unrecoverable in full.

Several protections are worth insisting on:

  • Segregated accounts. Ask the QI to hold your funds in a separately identified account at an FDIC-insured bank, under your name and tax ID number, rather than commingling them with other clients’ money. Federal regulations specifically address how earnings are treated in segregated versus commingled accounts.5eCFR. 26 CFR 1.468B-6 – Escrow Accounts, Trusts, and Other Funds Used During Deferred Exchanges
  • A fidelity bond covering employee theft and an errors-and-omissions policy covering professional mistakes. Ask for coverage amounts and check that they are proportional to the funds the QI typically holds.
  • Financial transparency about whether exchange funds are kept separate from any affiliated title company’s operating accounts, and about the types of investments the QI makes with held funds. Conservative, liquid investments reduce the chance of a shortfall.

The federal government does not license or certify 1031 exchange intermediaries, and no national regulatory body oversees them. A handful of states impose bonding or insurance requirements, but most do not. That gap makes your own due diligence the primary safeguard.

How To Choose a Qualified Intermediary

Dedicated 1031 exchange companies, title insurance subsidiaries, and bank-affiliated exchange divisions are the three most common types of entities that serve as QIs. Any of them can work. The questions to ask are the same regardless of corporate structure:

  • How many exchanges has the company completed, and how long has it been in business? A QI handling hundreds of exchanges per year is far less likely to miss a procedural step than one doing a handful.
  • Will your money sit in a segregated, FDIC-insured account? What is the fidelity bond coverage? Does the company carry E&O insurance?
  • Is the QI free of any relationship that would make it a disqualified person? A title company that also provided you legal services within the past two years cannot serve as your intermediary, even through a subsidiary.
  • How quickly does the QI answer the phone and process documents? The 45-day clock does not pause for a slow response.

What Happens If the Exchange Fails

When a 1031 exchange falls apart, whether from a missed deadline, a disqualified intermediary, or an inability to find replacement property, the IRS treats the original sale as a standard taxable event. The capital gains tax applies in the year you sold the relinquished property, even if you don’t get the funds back from the QI until the following year.

For 2026, long-term capital gains rates are 0%, 15%, or 20% depending on taxable income. Single filers pay 20% once taxable income exceeds $545,500; for married couples filing jointly, the 20% rate applies above $613,700. Most investors selling investment real estate land in the 15% or 20% bracket. Depreciation you claimed on the property is recaptured at a flat 25% rate.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses

High-income taxpayers face an additional layer. The 3.8% Net Investment Income Tax applies when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).7Internal Revenue Service. Net Investment Income Tax A failed exchange on a property with $400,000 of built-in gain could easily generate a combined federal tax bill approaching $100,000. That is the number to keep in mind when weighing a QI’s fee against a QI’s competence.

A Few Boundaries Worth Knowing

Since the Tax Cuts and Jobs Act took effect for exchanges completed after December 31, 2017, Section 1031 applies exclusively to real property.8Federal Register. Statutory Limitations on Like-Kind Exchanges Equipment, vehicles, artwork, and other personal property no longer qualify. Your QI can only facilitate an exchange of real estate held for investment or business use, and your personal residence does not qualify.

If you find the replacement property before you have a buyer for the current one, a reverse exchange lets you acquire the replacement first and sell afterward under a safe harbor in Revenue Procedure 2000-37. The structure is different: an Exchange Accommodation Titleholder takes title to the replacement through a special-purpose LLC and parks it while you sell the old property. The same 45-day and 180-day deadlines apply, running from the date the EAT acquires the parked property. Reverse exchanges typically cost several thousand dollars more than a forward exchange and require a QI experienced with the added logistics.