The role of the qualified intermediary (QI)

A 1031 exchange is different from an ordinary real estate sale because you generally cannot receive or control the sale proceeds yourself and then use them to buy replacement property. If the proceeds are available for you to use or withdraw, you may be treated as having received them even if the money never reaches your bank account. This is known as constructive receipt, and it disqualifies the exchange.

Because of this a QI acts as an independent third party engaged under a written exchange agreement to hold the proceeds from your sale. The QI must be in place before your sale closes. Once the proceeds are paid directly to you, they generally cannot later be placed into the exchange. The role of the qualified intermediary is defined in Treasury Regulation §1.1031(k)-1(g)(4).

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Mechanics process flow

How the QI handles your exchange

The QI connects the two sides of your exchange: the property you sell and the replacement property you buy. Before your sale closes, you assign your rights under the sale contract to the QI.

The sale proceeds are sent to the QI at closing. When you are ready to purchase replacement property, you assign your rights under that purchase agreement to the QI as well. For a DST investment, the QI sends your exchange funds directly to the DST sponsor once your subscription is accepted and you authorize the funding.

Your exchange agreement restricts your access to the funds during the exchange. Any funds not used to purchase replacement property are returned to you when permitted and may result in taxable boot.

Who cannot act as your QI

The rules generally exclude your own employee, attorney, accountant, investment banker or broker, or real estate agent or broker if they have worked for you in that role at any time in the two years before your sale closes. It is a common surprise, because those are exactly the people an investor would think to ask. Related parties, such as close family members or a company you own more than 10% of, are also excluded.

What to ask before you hire a QI

Qualified intermediaries are not subject to a federal licensing requirement, and state rules vary, so it is up to you to check the firm you hire.

  • How are funds held? In a separate account for your exchange, or pooled with other clients' money? Ask how your funds are protected.
  • 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 funds can be released to a closing only with your written approval.
  • 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.
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Your 45-day and 180-day deadlines

Both periods are measured from the date your sale closes and run at the same time. Neither is extended for weekends or holidays. The 180-day period ends earlier if your federal income tax return is due first, unless you file an extension.

Want to learn more? Explore our 1031 Resources

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