What Is a Qualified Intermediary?
A qualified intermediary (QI) is an independent third party required by the IRS to facilitate a 1031 tax-deferred exchange. The QI holds the proceeds from the sale of your investment property and uses those funds to acquire your replacement property -- preventing you from having constructive receipt of the sale proceeds, which would disqualify the exchange and trigger an immediate tax liability.
What Does a Qualified Intermediary Do?
The QI's role begins before the sale of your relinquished property and ends when you close on your replacement property. The core responsibilities are:
Why Is a Qualified Intermediary Required?
The IRS requires a QI because of the constructive receipt doctrine. If you receive or control the sale proceeds at any point during the exchange, the IRS treats it as a taxable sale -- even if you intend to reinvest the money. The QI acts as a legal buffer, holding the funds on your behalf so you are never in constructive receipt.
The rule is strict: If your sale proceeds are deposited into your personal or business bank account -- even for one day -- the exchange is disqualified and the full capital gain is taxable immediately. There are no exceptions and no ability to cure the defect after the fact.
This is why selecting a qualified, experienced QI is one of the most important decisions in your exchange. The QI is the legal and operational backbone of the entire transaction.
Who Can Serve as a Qualified Intermediary?
The IRS defines who is eligible and who is disqualified from serving as a QI. Understanding these rules is critical before engaging any intermediary.
Eligible QIs
- Independent exchange companies
- Attorney-led QI firms
- Title companies (if independent)
- Any unrelated third party
Disqualified Persons
- xYour real estate agent or broker
- xYour attorney (if acted as your agent in past 2 years)
- xYour CPA or tax advisor
- xFamily members (spouse, siblings, parents, children)
- xEntities you own more than 10% of
- xYour employer or employee
Important: Using a disqualified person as your QI will invalidate the entire exchange and make the full capital gain taxable immediately. There is no ability to cure this error after the fact.
Is the QI Industry Regulated?
The qualified intermediary industry is largely unregulated at the federal level. There is no federal licensing requirement, no minimum capital requirement, and no federal oversight body. Anyone can call themselves a qualified intermediary. Some states have enacted QI regulations, but most have not.
This creates real risk for investors. QI insolvencies and fraud have resulted in investors losing their exchange funds and facing unexpected tax bills. The most important protections to look for are:
Frequently Asked Questions
Common questions about qualified intermediaries and how they work.
What is a qualified intermediary?
A qualified intermediary (QI) is a third-party entity that facilitates a 1031 exchange by holding the proceeds from the sale of the relinquished property and using those funds to acquire the replacement property on behalf of the taxpayer. The QI must be independent from the taxpayer and cannot be a disqualified person under IRS regulations. Without a QI, the taxpayer would be in constructive receipt of the sale proceeds, which would disqualify the exchange.
Why is a qualified intermediary required for a 1031 exchange?
The IRS requires a qualified intermediary because the taxpayer cannot receive or control the sale proceeds during a 1031 exchange. If the taxpayer touches the money at any point, the exchange is disqualified and the full capital gain becomes taxable immediately. The QI acts as an independent party who holds the funds, prepares the exchange documents, and ensures the transaction meets all IRS requirements.
Who can serve as a qualified intermediary?
Any independent third party can serve as a QI, but the IRS prohibits certain disqualified persons from acting as QI. Disqualified persons include the taxpayer's agent (attorney, CPA, real estate agent, or employee who has acted in that capacity within the past 2 years), family members, and entities with common ownership. The QI industry is largely unregulated at the federal level, so credentials and experience vary widely.
What does a qualified intermediary actually do?
The QI prepares the exchange agreement, assigns the taxpayer's rights in the sale contract to the QI, receives the sale proceeds at closing, holds the funds in a segregated exchange account, prepares the replacement property acquisition documents, and disburses the funds to acquire the replacement property. The QI also prepares the identification letter and ensures all IRS deadlines are met.
Is the qualified intermediary industry regulated?
The QI industry is largely unregulated at the federal level. There is no federal licensing requirement, no minimum capital requirement, and no federal oversight body. Some states have enacted QI regulations, but most have not. This makes it critical to verify credentials before entrusting a QI with your exchange proceeds, which often represent hundreds of thousands or millions of dollars.
What credentials should a qualified intermediary have?
Look for the Certified Exchange Specialist (CES) designation from the Federation of Exchange Accommodators (FEA), membership in the FEA, a licensed attorney with deep 1031 exchange expertise, and segregated exchange accounts that are not commingled with the QI's operating funds. An attorney QI provides an additional layer of legal oversight that escrow-only QIs cannot offer.
How much does a qualified intermediary cost?
QI fees vary by provider and exchange complexity. Most QIs charge a flat fee ranging from $750 to $2,500 for a standard forward exchange. Reverse and improvement exchanges are more complex and typically cost more. At 1031 Federal Exchange, we charge a flat fee with no hidden costs. Contact us for a quote specific to your exchange.
What is the difference between an attorney QI and a non-attorney QI?
Most QI companies are escrow services that hold your money but have no legal or tax background. An attorney QI understands the full legal and tax framework of your exchange, not just the mechanics of fund-holding. This matters when complex issues arise, such as related party rules, LLC structuring, state-specific compliance requirements, or disputes with the IRS. Attorney-client privilege also applies when you work with an attorney QI.
Can my real estate agent or attorney serve as my QI?
No. Your real estate agent, attorney, CPA, or anyone else who has acted as your agent within the past 2 years is a disqualified person and cannot serve as your QI. This is a strict IRS rule. Using a disqualified person as your QI will invalidate the entire exchange and make the full capital gain taxable immediately.
What happens if my qualified intermediary goes bankrupt?
If your QI becomes insolvent or bankrupt while holding your exchange funds, your funds may be at risk. This is why segregated exchange accounts are critical -- your funds should be held in a separate account in your name, not commingled with the QI's operating funds. Ask any QI how they hold exchange funds before engaging them.
1031 Federal Exchange: An Attorney-Led QI
Steve Wolterman, Esq., CES is a licensed attorney and Certified Exchange Specialist who serves as your qualified intermediary. Unlike escrow-only QIs, you get legal oversight, attorney-client privilege, and deep 1031 exchange expertise on every transaction.