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A qualified intermediary can hold exchange proceeds for the length of the exchange period — up to 180 days after the relinquished property transfers, or the tax return due date if that comes first — before those funds move into a replacement property or a DST offering. During that window, the protection sitting behind the account is whatever the intermediary actually carries. That is the subject of 1031 exchange qualified intermediary bond insurance: a fidelity bond covering employee theft, an errors-and-omissions policy covering professional mistakes, and, separately from both, the structure the funds are held in. The three are often discussed as one thing. They are not, and they fail in different ways. What follows is a document-level view of each, and where in the process each one can be checked.
Why QI coverage sits in a regulatory gap
Most states impose no licensing or bonding requirement on qualified intermediaries. There is no federal registration regime for the role either — the intermediary's function is defined by Treasury regulation, not by a licensing statute. Qualified intermediaries therefore operate in a gap that most exchangers never think about until something goes wrong.
Eight states have legislated in the space. California, Colorado, Idaho, Maine, Nevada, Oregon, Virginia, and Washington have all adopted exchange-facilitator requirements, several with civil or criminal penalties attached. Everywhere else, the available information comes from the intermediary's own disclosures, the exchange agreement's fine print, and whatever documentation an exchanger asks for before wiring six or seven figures into a third party's control.
The documents that answer the question
- The proposed exchange agreement, in draft form before signature
- The current fidelity bond certificate, showing face amount, surety, and term
- The errors-and-omissions declarations page, showing limit and retroactive date
- Written confirmation of how exchange funds are held: qualified escrow account, qualified trust, or the intermediary's own operating account
- The states involved on both legs of the exchange, since a facilitator statute may apply where the property sits rather than where the intermediary is based
- A CPA or real estate attorney available to read the custody and release language
Reading each document
The fidelity bond certificate
A fidelity bond covers losses from employee dishonesty or theft inside the intermediary's operation, up to the bond's face amount. The certificate names the surety, states the coverage amount, and shows the term. An oral assurance that a firm is "fully bonded" cannot be checked against anything; a certificate can, including whether the bond is in force rather than lapsed at renewal.
The E&O limit against the size of the exchange
Errors-and-omissions insurance responds to professional mistakes — a missed deadline, a misapplied rule, a documentation error that costs deferral. The number that matters is the policy limit relative to the transaction. A $250,000 limit behind a $2 million exchange does not scale to a total loss caused by the intermediary's own negligence, and no amount of coverage language changes that arithmetic.
The retroactive date
Professional liability coverage is usually written on a claims-made basis: the policy answers only for claims made while it is active, and only for acts on or after the retroactive date printed on the declarations page. An intermediary that recently changed carriers may carry a retroactive date that leaves earlier work uncovered. The declarations page states it; the question is whether it reaches back across the firm's full operating history.
How the funds are actually held
Coverage and custody address different risks, and custody is the one that governs where the money sits day to day. Treasury Regulation 1.1031(k)-1(g)(3) sets out the qualified escrow account and qualified trust safe harbors — arrangements in which the exchanger's rights to receive, pledge, or borrow the funds are expressly limited and a third-party escrow holder or trustee stands between the exchanger and the cash. Proceeds held in an intermediary's general operating account, commingled with other clients' funds and the firm's working capital, present a materially different risk profile from proceeds in a segregated qualified escrow account at an insured institution.
State facilitator requirements
California's Division 20.5 of the Financial Code, enacted by SB 1007 in 2008 and operative from January 1, 2009, is the most cited example. It requires an exchange facilitator to satisfy one of three alternatives — maintain a fidelity bond of at least $1,000,000, deposit $1,000,000 in cash, securities, or an irrevocable letter of credit, or hold all exchange funds in a qualified escrow or qualified trust with withdrawals requiring the written authorization of both the client and the facilitator — and, separately, to carry errors-and-omissions insurance of at least $250,000 or make an equivalent deposit. Nevada's framework, in force since 2007, pairs a $1,000,000 fidelity bond with a $250,000 E&O policy and bars commingling of exchange proceeds with the operating account. The relevant question for any given deal is which standard an intermediary is meeting on that transaction, rather than what it describes as its national practice — and, because these statutes have been amended over time, the current text is the authority, not a summary of it.
The release language in the exchange agreement
Even a well-capitalized intermediary can move funds improperly if the agreement grants unilateral release authority. The clause to locate is the one governing disbursement: whether it requires the exchanger's written authorization, or an independent escrow holder's signature, before funds move anywhere — including into a sponsor's offering account.
The paper trail and its timing
A phone call confirming coverage leaves nothing behind in a dispute. The bond certificate, the declarations page, and the custody confirmation exist as documents and can be attached to the exchange agreement or delivered as a dated disclosure ahead of the first transfer. Collecting them takes a day or two of back-and-forth with a compliance desk — time that is easier to find before the relinquished sale closes than inside the 45-day identification window, which is a fixed statutory clock with no hardship extension.
Compare DST offerings once funds clear
See the current active DST cohort by sponsor, asset type, and structure.
Where the process tends to stall
No disclosure of the E&O carrier or limit. The declarations page is a routine document; a refusal to produce it leaves the coverage unverifiable, which is itself the answer to the question that was asked.
A bond far smaller than the exchange. A $100,000 fidelity bond behind a $1.5 million exchange caps recovery well below the exposure. Some intermediaries will raise coverage for a specific transaction or route the funds through a qualified escrow account; both are questions worth putting to them in writing.
Commingled operating account instead of segregated escrow. This is the custody structure with the least separation between client funds and firm funds, and the one the state statutes above were written to address.
An exclusion for exchanger claims. Some professional liability policies exclude claims from the very party who would bring them. The carrier or agent, not the intermediary's marketing material, can confirm whether the policy responds to a claim from an exchanger.
Unilateral release authority in the agreement. Where losses occur, they more often trace to unauthorized movement of funds than to a covered peril — which makes this clause the one that determines whether coverage limits ever come into play.
No professional review of the agreement. Custody and release language is the part of an exchange agreement most often signed unread, and the part a CPA or real estate attorney is fastest at reading.
Outside references
- The Federation of Exchange Accommodators maintains a published Code of Ethics and Conduct that member accommodators agree to follow, along with the Certified Exchange Specialist credential — both checkable against a firm's own claims
- Treasury Regulation 1.1031(k)-1(g), for the text of the safe harbors themselves
- The financial regulator in each state touching the exchange, where a facilitator statute applies
- A CPA or real estate attorney who has read exchange agreements before, ideally one familiar with DST replacement property
After the intermediary stage
Once custody terms are settled, the next set of questions moves to the replacement property: which offering receives the proceeds and which sponsor stands behind it. That review uses the same document-first approach — filings, disclosure documents, and track record rather than assurances. The Top1031 directory catalogs active DST offerings from SEC filings, with each offering tagged by sponsor, asset type, and a categorical leverage structure (all-cash, leveraged, zero-coupon, or unknown).
Questions that come up
Does a DST sponsor's insurance cover losses at the qualified intermediary stage?
No. Property-level and casualty coverage inside a trust applies to the assets the trust owns. It has no bearing on custody risk while proceeds sit with an intermediary before identification.
Does the Top1031 Sponsor Grade evaluate qualified intermediaries?
No. A Sponsor Grade is a sponsor-level letter grade (A through F, or NR where there is not enough tracked record to grade), assigned to DST sponsors from filing and outcome data. It is not a per-offering rating, not a suitability judgment, and it does not extend to qualified intermediaries — whose bonding, insurance, and custody arrangements are a separate verification exercise.
What happens if a qualified intermediary becomes insolvent mid-exchange?
A fidelity bond responds to dishonesty and an E&O policy to negligence; neither is a guarantee of the principal, and commingled funds in an insolvency may be treated differently from funds held in a segregated qualified escrow or trust. That distinction is why custody structure carries at least as much weight as coverage limits in the documents above.
The part most exchangers stop short of
A bond certificate and a declarations page are the easy documents to collect, and for many exchangers they are where the review ends. The harder question — whether the proceeds sit in a segregated qualified escrow account or in the intermediary's general operating account — is the one that shapes the outcome if something goes wrong, and it takes a single written question to a compliance desk to answer.