Why a QI is required

For a typical deferred 1031 exchange, a qualified intermediary is used to facilitate the exchange and help prevent you from having actual or constructive receipt of the sale proceeds.

A qualified intermediary, or QI, is sometimes called an exchange accommodator. The role is defined in Treasury Regulation §1.1031(k)-1(g)(4). The QI handles the mechanics of the exchange and holds your money while it is in progress.

The reason the role exists is simple. To preserve tax-deferred treatment, you generally cannot receive or control the sale proceeds before acquiring replacement property. A qualified intermediary holds the funds during the exchange until the replacement property is acquired.

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Mechanics process flow

What the QI actually does

You assign your interest in the property you are selling — the relinquished property — to the QI. The QI transfers it to the buyer.

You then assign your interest in the replacement property to the QI as well. The QI acquires it and transfers it to you.

In both transactions the QI stands in your place. You never take actual or constructive receipt of the proceeds, which is what keeps the exchange valid.

Constructive receipt is worth understanding. It does not only mean money in your account. If you could have obtained the funds, if they sat somewhere you had the right to direct, the IRS may treat that as receipt. The QI structure is designed so that does not happen, so you can have a valid exchange.

Where your money sits

The QI holds the sale proceeds in a trust or escrow account until the exchange completes. Only then do you get full access to the funds. Depending on your timing, that can be up to 180 days.

Who cannot act as your QI

The rules exclude anyone too close to you — relatives, and anyone who has had a financial relationship with you in the two years before closing, other than routine financial services.

In practice this rules out your own accountant, attorney, real estate agent or investment advisor if they have worked for you recently. It is a common surprise, because those are exactly the people an investor would think to ask.

The part nobody expects

Qualified intermediaries are not subject to a federal licensing requirement. Some states impose additional requirements on exchange facilitators, so investors should understand the protections and requirements that apply to the QI they select.

That means anyone can hold themselves out as a qualified intermediary, and the burden of checking falls on you — while they are holding proceeds from the largest transaction you may make this decade.

Choosing well

Your money sits with this firm for up to 180 days, and the entire deferral depends on their paperwork being right. The fee difference between a careful QI and a careless one is usually small. The difference in outcome is not.

Once you have a QI engaged, you can work out your 45/180 day deadlines.

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What to ask before you hire a QI

  • How are funds held? Segregated in your name, or pooled with other clients' money? Segregated is safer.
  • What protections are in place? Ask about fidelity bonds and errors and omissions coverage, and for the amounts.
  • Who can move the money? Ask if withdrawals require your written authorization.
  • How long have they done this? Look for a background in tax, law or finance, and years rather than months.
  • What does it cost? A low headline fee sometimes carries charges per property or per wire. Ask for the total.
  • Can you see the agreement first? Read it before you commit, not on closing day.

Want to learn more? Explore our 1031 Resources

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