→ 1031 Exchange Hub

Home → Markets → 1031 Exchange → 1031 Exchange Qualified Intermediary — How to Choose the Right QI

1031 Exchange Qualified Intermediary — How to Choose the Right QI

The qualified intermediary (QI) is the independent party that holds the exchange funds between the sale of the relinquished property and the purchase of the replacement property. The QI’s role is non-negotiable — if the investor touches the exchange proceeds at any point, the exchange fails. QI sele...

What the QI Does

The qualified intermediary performs five functions in a 1031 exchange: (1) Holds the exchange funds — receives the net proceeds from the sale of the relinquished property and holds them in a segregated trust or escrow account. (2) Prepares exchange documentation — the exchange agreement, assignment of contract rights, and coordination documents with the title companies on both the sale and purchase sides. (3) Receives the identification letter — the investor submits the signed 45-day identification to the QI. (4) Disburses funds for the replacement property — when the replacement property closes, the QI transfers the exchange funds to the closing agent for the purchase. (5) Reports the exchange to the IRS — the QI files Form 1099-S and provides the investor with the exchange documentation for their tax return.

How to Evaluate a QI

The QI holds the investor’s exchange funds — making the QI’s financial stability the most important evaluation criterion: (1) Fund security — how are the exchange funds held? Segregated accounts (separate account for each exchange) are safer than commingled accounts (multiple exchanges in one account). FDIC-insured accounts provide protection up to $250,000 per depositor. For exchanges above $250,000, the QI should use multiple FDIC-insured accounts or a qualified trust company. (2) Insurance and bonding — does the QI carry fidelity bonds and errors-and-omissions insurance? What are the coverage limits? (3) Industry membership — is the QI a member of the Federation of Exchange Accommodators (FEA)? FEA members adhere to industry standards and ethical guidelines. (4) Track record — how many exchanges has the QI completed? How long have they been in business? (5) Pricing — QI fees typically range from $750–$1,500 for a standard forward exchange and $2,000–$5,000 for a reverse exchange. Significantly lower fees may indicate corners being cut on fund security.

Disqualified Person Rules

The IRS prohibits certain persons from serving as the qualified intermediary — and using a disqualified person as QI will invalidate the entire exchange. Disqualified persons include: the investor’s attorney (if they have represented the investor in the last 2 years), the investor’s CPA or accountant (same 2-year rule), the investor’s real estate agent or broker, the investor’s employee, and the investor’s family member (spouse, parent, child, sibling, grandparent, grandchild). The 2-year lookback applies to attorneys and accountants — an attorney who represented the investor 3 years ago is not disqualified. The disqualification is personal — if the investor’s attorney works at a large law firm, the firm may be able to designate a different attorney within the firm to serve as QI, as long as the specific attorney who represented the investor is not involved. Best practice: use a dedicated exchange company as QI, not an attorney or CPA — this avoids the disqualified person risk entirely.

QI Insolvency Risk

The most devastating QI risk is insolvency — if the QI becomes insolvent while holding the exchange funds, the investor may lose both the funds and the tax deferral. This has happened: several QI companies have filed for bankruptcy over the past two decades, with investors losing millions in exchange funds. Protection strategies: (1) Segregated accounts — ensure the exchange funds are held in a segregated account in the investor’s name, not commingled with other exchanges or the QI’s operating funds. (2) Qualified escrow or trust — exchange funds held in a qualified escrow or qualified trust (as defined in the regulations) provide additional legal protection against QI creditor claims. (3) FDIC coverage — for exchanges within FDIC limits, the funds are protected against bank failure. (4) Fidelity bond — the QI’s fidelity bond provides coverage against employee theft or fraud.

when-engage

The QI must be engaged BEFORE the relinquished property closes — if the exchange funds are disbursed to the investor (or to anyone other than the QI) at any point, the exchange fails. Best practice: engage the QI 30–60 days before the expected close of the relinquished property. The QI prepares the exchange agreement, the assignment of contract rights, and the closing instructions for the title company. The exchange agreement must be executed before the closing of the relinquished property. Waiting until the week before closing to engage the QI creates unnecessary documentation pressure and increases the risk of procedural error. The Own Luxury Homes® specialist coordinates QI engagement as part of the exchange planning timeline — ensuring the QI is selected, the exchange agreement is executed, and the closing instructions are delivered to the title company well before the relinquished property’s closing date.

Own Luxury Homes® Buyer Hubs: Florida Insurance & Resilience — Self-Employed Buyers — Crypto Real Estate

faq

How much does a qualified intermediary cost?

Standard forward exchange: $750–$1,500. Reverse exchange: $2,000–$5,000 (plus EAT fees). Construction exchange: $2,000–$5,000. Fees vary by transaction complexity, not by exchange amount. The QI fee is a small fraction of the tax deferred — on a $2M exchange with $250,000 in deferred tax, a $1,200 QI fee is 0.5% of the tax saved.

Can my CPA be my qualified intermediary?

Only if they have not acted as your CPA within the last 2 years. In practice, using your CPA as QI is not recommended even if they are technically not disqualified — the risk of inadvertent disqualification and the lack of specialised exchange expertise make a dedicated exchange company the safer choice.

What happens if my QI goes out of business during my exchange?

If the QI becomes insolvent, the exchange funds may be trapped in bankruptcy proceedings. The investor may lose access to the funds and the 1031 exchange may fail if the replacement property cannot be purchased. This risk is mitigated by using a QI with segregated accounts, fidelity bonds, and strong financial standing.

When should I engage a qualified intermediary?

Engage the QI BEFORE the relinquished property is listed for sale. The exchange agreement must be in place before the relinquished property closes — if the proceeds are disbursed to the investor before the QI is engaged, the exchange fails. Best practice: engage the QI 30–60 days before the expected close of the relinquished property.