What is a Qualified Intermediary?
A qualified intermediary (QI), also called an accommodator or exchange facilitator, is a third-party entity that facilitates a Section 1031 exchange by holding the sale proceeds from the relinquished property and using them to acquire the replacement property on behalf of the investor. The QI is a mandatory participant in a 1031 exchange — without one, the exchange fails and capital gains taxes become due immediately.
The reason a QI is required is simple: the IRS says you cannot have "actual or constructive receipt" of the sale proceeds. If the money flows through your bank account, even briefly, the exchange is disqualified. The QI serves as the independent custodian who holds the funds in escrow, preventing you from having access to the money during the exchange period.
What a QI does
- Prepares the exchange agreement and assignment documents before the relinquished property closing
- Receives the sale proceeds directly from the title company at closing (proceeds never touch the investor's account)
- Holds funds in a segregated escrow account for the duration of the exchange
- Receives the investor's written identification of replacement properties within the 45-day deadline
- Disburses funds to acquire the replacement property at closing
- Provides year-end tax reporting documentation (Form 1099 if boot is received)
Choosing a QI
The QI industry is largely unregulated. There is no federal licensing requirement, no bonding requirement in most states, and no standardized oversight. This means choosing a reputable QI is critical — your exchange proceeds (potentially hundreds of thousands of dollars) sit in their escrow account for up to 180 days.
Key factors when selecting a QI:
Financial security: How does the QI protect your funds? Look for QIs that use segregated, qualified escrow accounts (not commingled funds), fidelity bonds, and errors and omissions insurance. Ask about their financial statements and whether they have been audited.
Experience: How many exchanges has the QI facilitated? How long have they been in business? 1031 exchanges have specific rules, and an inexperienced QI can make mistakes that disqualify your exchange.
Fees: QI fees typically range from $600 to $1,500 for a standard exchange. More complex transactions (reverse exchanges, improvement exchanges) cost more — $5,000 to $15,000+. Compare fees, but don't choose solely on price. The cheapest QI who makes a mistake costs far more than the most expensive one who does it right.
Who cannot be a QI
The IRS disqualifies certain parties from serving as your QI due to conflicts of interest: your agent (real estate agent, attorney, CPA, or anyone who has acted as your agent within the previous 2 years), your employee, or any entity in which you have more than 10% ownership. Banks and title companies are generally eligible to serve as QIs because they act in a ministerial capacity, not as your agent.
Risk factors
The biggest risk is QI insolvency. If the QI goes bankrupt while holding your exchange funds, you may lose your money. This happened several times during the 2008 financial crisis when QIs invested exchange funds in risky instruments that lost value. Look for QIs that hold funds in FDIC-insured accounts and don't invest exchange proceeds in anything other than cash equivalents.