Qualified Intermediary (QI) Explained
The qualified intermediary is the most important party in your 1031 exchange — and the one most investors choose without due diligence. This is what they do, what they cost, how to vet one, and how to avoid the fraud stories that show up in the industry every few years.
What a qualified intermediary does
A qualified intermediary (also called an “accommodator” or “exchange facilitator”) is the neutral party who holds the money during your 1031 exchange. When you sell your relinquished property, the closing wires the proceeds to the QI rather than to you. The QI then uses those funds to acquire your replacement property.
From the IRS's perspective, the exchange is structured as if the QI bought your property from you and then sold you a replacement — you're not receiving cash, you're receiving property. That's the fiction the tax code requires in order to defer the gain.
Specific duties
- Drafts the exchange agreement and assignment of rights documents
- Takes assignment of your sale contract and purchase contract
- Holds sale proceeds in a segregated exchange account (never commingled)
- Accepts your written identification of replacement properties
- Wires funds to the replacement property closing
- Issues the 1099 and tracks the paperwork for your tax return
- Advises on the mechanics (but not the tax or legal implications — that's your CPA and attorney)
Why the IRS requires a qualified intermediary
The core doctrine is constructive receipt. If you have the right to control or access your sale proceeds — even for five minutes — the IRS considers you to have received taxable income. Once you've received the money, you can't un-receive it by later deciding to do a 1031.
The QI is the “safe harbor” created by Treasury Regulation §1.1031(k)-1(g)(4). As long as the QI (a) is a qualified third party and (b) holds the funds under the proper exchange agreement, you're treated as not having constructive receipt. The exchange qualifies.
Putting the funds in your attorney's trust account, in escrow, or in any account you have signature authority over fails the safe harbor. The IRS has been consistent on this for decades.
Who cannot be your qualified intermediary
Treasury Regulation §1.1031(k)-1(k) defines “disqualified persons” who cannot act as your QI:
- Your agent within the past 2 years — this catches most of the disqualifiers below
- Your attorney, CPA, or tax advisor (if they've represented you professionally in the past 2 years)
- Your real estate agent or broker on this transaction or within the past 2 years
- Your employee, employer, or business partner
- Your family members (spouse, siblings, ancestors, descendants)
- A corporation or entity you or your family controls (more than 10% ownership)
The regulation has a narrow exception: providing routine financial services (banking, title, escrow) doesn't disqualify someone. But actually serving as your attorney or CPA does.
This trips up investors constantly. “My attorney said he'd hold the money” — no, he can't. “My accountant set up an LLC to be the QI” — no, that's still the accountant. The third party must be genuinely independent.
What qualified intermediaries cost
Pricing varies by complexity. Typical ranges:
| Exchange Type | Typical QI Fee |
|---|---|
| Forward (delayed) exchange | $750 – $1,500 |
| Multiple-property forward exchange | $1,500 – $3,000 |
| Reverse exchange | $5,000 – $10,000+ |
| Improvement (construction) exchange | $7,500 – $15,000+ |
| DST exchange (QI portion) | $1,500 – $2,500 |
Additional small costs: overnight document shipping, wire fees, and in some states a filing fee. Budget another $200-400.
Watch out for hidden fees
Some QIs advertise low base fees and make margin on:
- Keeping interest earned on your held funds (some pay none, some pay treasury-level rates)
- Per-property identification fees
- Document fees for amendments or extensions
- Wire fees that get marked up
Ask for a flat fee quote that includes everything. Reputable QIs will give it to you in writing.
How to choose a qualified intermediary
You're handing someone hundreds of thousands of dollars for 45-180 days. Underwriting them matters.
1. Verify the credential
The Federation of Exchange Accommodators offers the voluntary Certified Exchange Specialist (CES) designation. Requires five years of full-time QI experience and passing a proctored exam. Not a legal requirement but a meaningful signal of professional commitment.
2. Ask about account structure
Your exchange funds should sit in a segregated account in your name or under your tax ID, not commingled with the QI's operating funds or other clients'. Ask for the bank, account structure, and whether you can receive account statements. Any hesitation is a red flag.
3. Check the insurance and bonding
The QI should carry:
- A fidelity bond covering employee dishonesty for at least the size of the exchanges they typically handle (often $10M+)
- An errors & omissions (E&O) insurance policy covering professional negligence
- Where required (California, Nevada, Colorado, Washington, Virginia), state-specific bonding or written guarantees
Ask for a certificate of insurance in your name for the duration of the exchange. Legitimate QIs provide this without hesitation.
4. Review the exchange agreement
The agreement should clearly state: fund segregation, interest treatment, fee structure, timeline, and the QI's obligations at each step. Have your attorney read it — this is what you're paying them for.
5. Get references
Ask for references from CPAs and real estate attorneys the QI works with. Call two of them. Ask a specific question: “Have they ever missed a deadline or made an error that cost your client money?”
6. Trust your gut on communication
You'll be in frequent contact — pre-closing, at closing, during identification, at the replacement closing. If the QI is slow to respond or evasive with questions now, it'll be worse under deadline pressure.
The fraud risk (and how to avoid it)
There's no federal licensing requirement for QIs. Anyone can open a bank account and start calling themselves a qualified intermediary. This has led to real fraud cases over the years:
- LandAmerica 1031 Exchange Services collapsed in 2008, taking $450M of client exchange funds into bankruptcy
- Edward Okun (1031 Tax Group) was convicted in 2008 of a $130M fraud involving client exchange funds
- Multiple smaller cases of commingling, Ponzi-style operation, or outright theft
The protection is structural:
- Segregated accounts mean your money can't be touched by creditors or other clients
- Fidelity bonds provide an insurance backstop if employees steal funds
- State bonding (where applicable) creates additional recourse
- Established firms with audited financials have more at stake and more oversight
QI promises returns on your held funds that are meaningfully above treasury yields • Vague answers about account structure • No fidelity bond or E&O policy • Fees dramatically below market rate • Pressure to use their specific title or escrow company • Refusal to provide a written exchange agreement in advance
What “Certified Exchange Specialist” means
The CES designation is administered by the Federation of Exchange Accommodators. Requirements:
- Minimum 5 years of full-time experience as a QI or 1031 exchange specialist (roughly 1,000+ exchanges)
- Passing the CES exam covering tax code, regulations, exchange mechanics, and fraud prevention
- Ongoing continuing education (30 hours every 2 years)
- Adherence to the FEA Code of Ethics
There are roughly 200 active CES holders nationwide. Not every competent QI has the credential, but every credentialed QI has demonstrated competence.
Your QI's role, step by step
- Pre-engagement (2+ weeks before closing). QI drafts exchange agreement, reviews your sale contract, adds assignment language.
- Day 0 — sale closing. QI is assigned as the seller of record. Funds wire directly from closing to the QI's segregated exchange account.
- Days 1-44 — identification period. QI is available to answer questions about qualifying properties and identification rules. Does not give tax advice.
- Day 45 — identification deadline. You deliver written identification to the QI. QI logs receipt, which is the proof-of-timeliness record for your return.
- Days 45-179 — exchange period. QI coordinates with the replacement property's closing agent. Reviews assignment documents.
- Replacement closing (any time before Day 181). QI wires funds directly to closing. You take title to the new property.
- Post-closing. QI provides the exchange record and 1099-B for your tax return. You file Form 8824 with your CPA.
Frequently asked questions
Can my CPA be my qualified intermediary?
No. The IRS defines your CPA as a disqualified person if they've acted as your tax advisor within the past 2 years. This is hard rule, not guidance.
Can I act as my own qualified intermediary through an LLC I control?
No. Any entity you or your family control more than 10% of is disqualified. The QI must be genuinely independent.
How long does the QI hold my money?
From sale closing (Day 0) until replacement closing (up to Day 180). Typical range is 30-120 days depending on how quickly you close on the replacement.
Do I earn interest on the funds held by the QI?
Sometimes. Policies vary. Reputable QIs pass through interest at treasury-level rates in a money market or similar. Some keep all interest as part of their fee. Ask in writing before you engage.
What if my QI goes bankrupt mid-exchange?
This is why segregated accounts matter. Properly-segregated funds are yours, not the QI's, and are not part of a bankruptcy estate. Commingled funds can get pulled into bankruptcy proceedings — this is what happened in the LandAmerica collapse.
Can my qualified intermediary also help me find replacement properties?
Your QI should not double as your real estate agent — that's a conflict and can disqualify them. They can point you to general resources and reputable brokers but should not be sourcing specific deals.
Do you serve as a qualified intermediary for clients outside New York?
Yes. I'm a Certified Exchange Specialist at The Sontag Group and handle exchanges nationwide. See nationwide coverage or my state-specific pages.
Considering me as your QI?
Certified Exchange Specialist, 5,000+ exchanges facilitated, $1B+ handled. 30-minute consultation to discuss your specific exchange — no obligation.
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