The QI Decision Is More Important Than Most Investors Realize
The qualified intermediary is the party responsible for holding your exchange proceeds, preparing your exchange documents, and ensuring your transaction meets IRS requirements. A mistake by the QI -- a missed deadline, a documentation error, a fund security failure -- can disqualify your entire exchange and trigger an immediate tax liability on the full gain from your property sale.
Despite the stakes, many investors choose a QI based on a referral from their real estate agent or a quick internet search, without asking the questions that actually matter. Here is what to ask before you sign anything.
Fund Security Questions
How are my exchange funds held? This is the most important question. Your exchange proceeds should be held in a segregated escrow account in your name, separate from the QI's operating funds and other clients' exchange proceeds. Ask for written confirmation of this. Some QI companies have faced insolvency issues in the past, and investors whose funds were commingled lost their exchange proceeds entirely.
What bank holds the funds? Know where your money is. The account should be at an FDIC-insured institution. Ask for the name of the bank and whether the account is titled in your name or the QI's name.
Can I verify the account balance during the exchange period? A reputable QI will have no objection to providing you with account statements or confirmation of the balance during your exchange period.
Credentials and Experience Questions
Who specifically will be handling my exchange? You want to know the name and credentials of the person responsible for your transaction, not just the company name. Ask whether you will have direct access to that person or whether you will be working through a support system.
Do you hold the CES designation? The Certified Exchange Specialist (CES) is the only nationally recognized professional credential in the 1031 exchange industry, awarded by the Federation of Exchange Accommodators. It requires passing a comprehensive examination and ongoing continuing education. Not every competent QI holds the CES, but it is a meaningful signal of professional knowledge.
How many exchanges have you handled with my specific property type and structure? Experience with residential investment properties does not automatically translate to experience with commercial properties, reverse exchanges, or improvement exchanges. Ask specifically about your transaction type.
Fee and Contract Questions
What is your complete fee structure? Ask for the total fee for your specific transaction in writing before you sign. Some QI companies advertise low base fees but charge additional fees for identification notices, wire transfers, document preparation, or complex exchange structures. Get the full picture upfront.
Is there a fee if the exchange fails to close? If your exchange falls apart -- the replacement property falls through, you cannot identify a suitable property within 45 days -- what does the QI charge? Some companies charge full fees regardless of outcome.
What does the exchange agreement say about your liability? Read the exchange agreement carefully. Some QI companies include broad liability limitations that effectively eliminate your recourse if they make an error. Understand what you are signing.
Process and Communication Questions
How do I submit my identification notice? The 45-day identification deadline is strict and unforgiving. Understand exactly how the QI requires identification notices to be submitted and what documentation is required.
What happens if I miss the 45-day or 180-day deadline? A competent QI will explain the consequences clearly and have a process for monitoring your deadlines. If the QI is vague about this, that is a red flag.
How do you coordinate with my closing attorney and title company? The QI needs to work closely with the parties on both sides of the transaction. Ask how they handle this coordination and whether they have experience working with closing attorneys in your market.
The Bottom Line
A qualified intermediary who cannot answer these questions clearly and confidently is not the right QI for your exchange. The stakes are too high to choose based on price alone or on a referral without doing your own due diligence.
1031 Federal Exchange is operated by Steve Wolterman, a licensed attorney and Certified Exchange Specialist. We are happy to answer all of these questions and provide written confirmation of our fund security practices, fee structure, and credentials before you sign anything. Contact us at 513-586-6879 for a free consultation.