Two Different Models for the Same Required Role
The IRS requires a qualified intermediary for every 1031 exchange. The QI holds your exchange proceeds, prepares the exchange documents, and facilitates the transfer of both properties. What the IRS does not specify is what type of entity must fill that role.
In practice, two models dominate the market: escrow-based QIs (often subsidiaries of title insurance companies or escrow firms) and attorney-operated QIs. Both can legally serve as your QI. The differences lie in how your exchange is handled, who is responsible for it, and what happens when the transaction gets complicated.
How Escrow-Based QIs Work
Escrow-based QIs are typically subsidiaries of large title insurance companies or independent escrow firms. They process exchanges at high volume using standardized systems and trained exchange coordinators. The model is efficient for straightforward forward exchanges, and the large companies in this space have decades of experience.
The exchange coordinator assigned to your transaction will be knowledgeable about the exchange process, the IRS timelines, and the documentation requirements. What they typically are not is an attorney or a Certified Exchange Specialist. For most standard exchanges, this is not a problem. The process is well-defined, and experienced coordinators handle it competently every day.
Where the model can show limitations is in complex transactions. If your exchange involves a reverse structure, an improvement exchange, an LLC or trust, or a situation where the exchange documents need to be coordinated carefully with your tax and legal advisors, the coordinator may escalate to a supervisor or refer you to outside counsel. The expertise is not always in the room when you need it.
How Attorney QIs Work
An attorney QI is operated by a licensed attorney who serves directly as the qualified intermediary. The attorney handles the exchange documents, oversees the transaction, and is the person you communicate with throughout the exchange period.
The attorney background is relevant in several specific ways. Exchange documents are legal contracts. The exchange agreement, the assignment of the purchase and sale agreement, the identification notice, and the replacement property acquisition documents all have legal implications. Having an attorney draft and review those documents means someone with formal legal training is responsible for their accuracy and compliance.
For complex transactions -- reverse exchanges, improvement exchanges, exchanges involving LLCs or trusts -- the attorney background means the QI can engage directly with the legal and tax issues that arise, rather than referring them out. This does not mean the attorney QI is providing legal advice to the taxpayer. It means the QI has the professional background to understand the issues and structure the exchange accordingly.
Direct Comparison: Key Factors
Who handles your exchange: Escrow QI -- trained exchange coordinator, may be one of many on a team. Attorney QI -- the attorney directly, typically with a smaller client load and more direct access.
Professional credentials: Escrow QI -- varies; some coordinators hold the CES designation, many do not. Attorney QI -- licensed attorney; may also hold CES designation.
Complex transaction experience: Escrow QI -- depends on the company and coordinator; large companies have seen most scenarios. Attorney QI -- legal training directly applicable to complex document and entity structures.
Fund security: Both models should hold exchange funds in segregated accounts. Ask any QI you consider how funds are held and request documentation. Size of company does not automatically equal better fund security.
Fee structure: Escrow QIs often have tiered fee structures based on transaction size. Attorney QIs often charge flat fees. Compare total cost for your specific transaction size.
Access and communication: Escrow QI -- typically through a support system; may have direct coordinator access. Attorney QI -- typically direct access to the attorney handling your exchange.
Which Is Right for Your Exchange?
For a standard forward exchange on a single investment property, either model can work well. The most important factors are the QI's experience, their fund security practices, and the clarity of their fee structure.
For complex transactions -- reverse exchanges, improvement exchanges, multi-property exchanges, or exchanges involving LLCs or trusts -- the attorney QI model offers advantages that are directly relevant to the complexity of the transaction.
1031 Federal Exchange is operated by Steve Wolterman, a licensed attorney and Certified Exchange Specialist. We handle exchanges of all types for residential and commercial investors nationwide. Contact us at 513-586-6879 to discuss your exchange.