Your qualified intermediary holds your exchange proceeds, often hundreds of thousands or millions of dollars, usually in a qualified escrow or trust account. If they mismanage the funds, go bankrupt, or make a procedural error, the exchange can fail and the money can be at risk. It's the most consequential decision in a 1031 exchange.
When you sell property in a 1031 exchange, the proceeds never land in your bank account. They go straight to a company you hired to run the exchange: a qualified intermediary, or QI, which holds the money, often six or seven figures, until you close on the replacement property.
That routing isn't a technicality. Take the cash yourself, even briefly, and the tax you were deferring comes due. So the QI ends up holding a large sum of your money for the length of the deal, and choosing the wrong one can sink the exchange or put the money at risk. It's the most consequential decision you'll make in a 1031 exchange.
What a qualified intermediary does
A QI (also called an accommodator or facilitator) handles four jobs:
- Prepares the exchange documents - the exchange agreement, the assignment of your purchase and sale contracts, and the notices to closing agents.
- Holds the exchange funds. When your property sells, the proceeds go directly to the QI, who keeps them in a segregated or pooled escrow account until you're ready to buy.
- Receives your identification letter. Your written identification of replacement properties goes to the QI, which becomes the formal record for IRS compliance.
- Disburses funds at closing. When you close on the replacement property, the QI sends the held funds to the closing agent.
The QI is not your advisor. They run the mechanics. Strategy comes from your CPA, attorney, and real estate agent.
Who can and can't serve as your QI
The IRS bars certain people from acting as your QI. Under the "disqualified person" rules in Treasury Regulation 1.1031(k)-1(k), you can't use:
- Your attorney, if they've represented you in the past two years
- Your CPA or accountant
- Your real estate agent or broker
- Your employee
- Any family member
- Any entity you own or control
The logic is constructive receipt: the IRS treats a related party holding your funds as effectively you holding them, which would collapse the deferral. So the QI has to be an independent, arm's-length party. In practice, that means hiring a professional QI company.
The six things to evaluate
- Fund security. This is where the real risk sits. How the QI holds your money determines what happens to it if the firm fails. The strongest protection is a segregated escrow or trust account, one per client, at an FDIC-insured bank with you named as the beneficial owner. Some states require exactly that; others leave it to the firm. Pooled accounts, where your money sits alongside other clients' funds, are weaker. Beyond the account structure, it's worth knowing whether the firm carries errors-and-omissions insurance (cover for its professional mistakes) and a fidelity bond (cover for theft by its own employees), and whether it has ever lost client funds.
- Experience and volume. How many exchanges has the firm handled, and for how long? A company doing hundreds or thousands a year has seen the edge cases. A newer QI on its tenth exchange may not have.
- Responsiveness. The 45-day identification deadline is absolute. A QI that's slow to return calls, emails, or documents inside that window can cost you the exchange. Ask for a dedicated contact, not a call center.
- Document quality. Exchange agreements, assignments, and identification letters have to be exact. A wrong entity name, a loose property description, or a miscalculated deadline can void the whole thing. Ask to see sample documents first.
- Industry affiliation. Membership in the Federation of Exchange Accommodators (FEA) means the QI signs on to a code of ethics and peer standards. Not a guarantee, but a signal.
- State regulation. Some states regulate QIs and set minimum bonding, insurance, and fund-handling rules. In states that don't, the due diligence is entirely yours.
Questions to ask before hiring
Any reputable QI will answer these without hesitation:
- How are exchange funds held - segregated or pooled, and at which bank?
- What are your fidelity bond and E&O insurance limits?
- How many exchanges did you handle last year?
- Who is my primary contact, and what response time do they commit to?
- Have you ever had a client's exchange disqualified because of an error on your part?
- What happens to my funds if the company goes bankrupt or is acquired?
- Do you earn interest on held funds, and does any of it go to the client?
- Are you a member of the Federation of Exchange Accommodators?
- Are you licensed or regulated in my state?
- Can you give references from attorneys or CPAs who work with you regularly?
For a printable version, see our QI interview questions template.
Red flags
- A fee that's too low. If a QI quotes $300 against a market rate of $800-$1,500, ask how they make their money. Some low-fee QIs earn it all from interest on the funds they hold.
- Pooled, uninsured accounts. Funds mixed into a general operating account can be exposed if the firm goes under.
- No E&O insurance. This is basic professional cover. Its absence suggests a firm that's undercapitalized or unsophisticated.
- Dodging fund-security questions. A legitimate QI explains its protections readily. Evasion is a deal-breaker.
- No physical office or verifiable history. The industry has had fraud cases where operators collected funds and disappeared. Verify the physical presence, the business registration, and the track record.
National vs. local QIs
The big national firms - IPX1031, Asset Preservation, Exeter 1031, and others - offer scale, established processes, and institutional-grade fund protection. They run thousands of exchanges a year on deep compliance infrastructure.
Local and regional QIs offer more personal service and easier access when you have questions. They're often run by attorneys or real estate professionals who know the local market well.
Neither is categorically better, and the six criteria apply to both. A well-run regional QI with proper fund protection and strong references can work as well as a national firm with a dedicated contact and a proven track record.
What to expect on fees
Exchange type | Typical QI fee range |
|---|---|
Standard deferred | $750 - $1,500 |
With multiple replacement properties | $1,000 - $2,500 |
Reverse exchange | $5,000 - $15,000 |
Improvement/construction exchange | $5,000 - $15,000 |
Combined reverse + improvement | $10,000 - $25,000 |
Most QIs also charge per-wire fees ($25-$50), and some add amendment fees ($150-$300) if you change your identification list inside the 45-day window.
Comparing quotes shows the range, but the range is small next to what's at stake. The gap between a $900 QI and a $1,300 QI is minor relative to the six or seven figures they'll be holding.
Your QI holds your money and runs the mechanics that decide whether the exchange succeeds. Fund security is where the real risk sits, followed by experience and responsiveness, and those are the things worth pinning down before the exchange agreement is signed. A QI that cuts corners on fund protection or paperwork can cost far more than the tax the exchange was meant to defer.
Frequently asked questions
What happens if my QI goes bankrupt?
If your funds sit in a segregated, qualified escrow or trust account at an FDIC-insured bank with you named as the beneficial owner, they're generally protected from the QI's creditors. If they're pooled in the QI's general account, they can be exposed in a bankruptcy proceeding. That's the single biggest reason to ask how funds are held.
Can my real estate attorney be my QI?
Not if they've provided legal services to you in the past two years, with limited exceptions for routine real estate closings under some interpretations. The disqualified-person rules exist to prevent constructive receipt through a related party.
Do I need a QI if I'm doing a simultaneous exchange?
Technically, a simultaneous exchange, a same-day swap, can be structured without one. In practice, same-day timing is nearly impossible to guarantee, and a QI covers you if any gap opens up between the two closings. That protection comes for a relatively modest fee.
Should I use the QI my real estate agent recommends?
It's a common starting point. Agents sometimes recommend QIs based on referral relationships rather than fund-security practices, so the same evaluation criteria apply no matter who makes the introduction.