Your QI will hold hundreds of thousands of your dollars for up to six months. How safely the firm holds that money - segregated accounts, FDIC insurance, a fidelity bond - matters more than what it charges.
Your qualified intermediary will hold six- or seven-figure proceeds for up to six months, and you will have no legal access to that money the entire time. So the choice you make before signing an exchange agreement is really a custody decision: who holds your money, and how safely. What follows is the due diligence for making it - the features a QI must have, the warning signs, and the questions to ask.
What a QI does
A qualified intermediary handles three things in a deferred 1031 exchange:
- It holds the sale proceeds. When the relinquished property closes, the money goes straight to the QI, never to you. That custody is the whole point: it prevents constructive receipt, the IRS rule that disqualifies an exchange the moment you can touch the cash.
- It runs the paperwork. The QI drafts the exchange agreement, works with title and escrow to route the proceeds, timestamps your written identification of the replacement property, and releases the funds when you close.
- It tracks the clock. A reliable QI sends deadline reminders, confirms it received your identification, and keeps the mechanical steps on schedule.
A QI does not give tax advice, legal advice, or investment recommendations. A QI that starts recommending specific properties or handing out tax opinions has taken on a conflict, not added a service.
Must-haves
1. Segregated escrow accounts
This is the one that matters most. Your funds have to sit in a separate account, not pooled with the QI's operating cash or other clients' money.
The account should be at an FDIC-insured bank and held in the QI's name in its capacity as your intermediary - something like "Acme QI Services, as QI for [Your Name]." Commingling is the biggest risk in this business. If a QI mixes client funds and then hits financial trouble, your money is exposed alongside everything else in bankruptcy.
2. Fidelity bond
A fidelity bond covers theft or fraud by the QI's own employees. If someone inside diverts your funds, the bond pays up to its limit. Ask for the number. A firm holding tens of millions in client money should carry coverage in the millions, not a token $100,000.
3. Errors-and-omissions insurance
Where the fidelity bond covers bad actors, errors-and-omissions (E&O) insurance covers honest mistakes: a miscalculated deadline, a misrouted wire, a paperwork slip that breaks your exchange. Ask for the policy limit and confirm it is current.
4. Dual-authorization on disbursements
Reputable QIs require two officers to sign off on any wire out, so no single employee can move money alone. Ask exactly how many approvals a wire release takes and how each one is verified.
5. Written disbursement procedures
The QI should be able to hand you documented procedures: what authorization it needs from you, how it verifies instructions (a phone callback, not just an email), and what audit trail it keeps. Ask to see this in writing before you sign.
6. Independent audit or SOC report
Firms handling real volume should undergo an annual independent audit or maintain a SOC report - an outside auditor's assessment of whether their controls actually work as described. Ask whether their financials are independently audited and whether they hold a SOC 1 or SOC 2 report.
7. Cybersecurity controls
Wire fraud aimed at 1031 closings is a real threat, and the classic version is business email compromise, where a scammer impersonates a party to the deal and reroutes your wire. Ask what the QI does about it: encrypted communication, verified callbacks on wire instructions, multi-factor authentication on accounts, and phishing training for staff. The wire fraud prevention guide goes deeper.
Red flags
Red flag | Why it matters |
|---|---|
Funds are commingled with other clients or operating accounts | Your money is exposed if the QI faces financial difficulty |
No fidelity bond or E&O insurance, or QI cannot provide documentation | No safety net if something goes wrong |
QI is a disqualified person (your attorney, CPA, broker, or agent within the past two years) | Violates Treasury Regulations; shows disregard for compliance |
Fees significantly below market ($200 or less for a standard exchange) | Likely subsidized by keeping interest earned on your funds, or cutting corners on compliance |
QI offers investment advice or recommends specific replacement properties | Role conflict; may have a financial interest in the recommendation |
QI cannot clearly explain fund-security measures | Opacity about custody procedures is not confidentiality; it is a warning |
QI pressures you on timing or property decisions | Suggests misaligned incentives |
No clear process for weekend or holiday communication | Day 45 may fall on a weekend; you need to reach your QI |
Fee structure and the interest question
Fees for a standard deferred exchange usually run $750 to $1,500. Reverse and improvement exchanges, the more complicated structures, run $2,000-$5,000 or more.
The variable people miss is interest. Your proceeds earn interest while they sit in escrow, and QIs handle that money differently. Some return all of it to you. Some keep it as part of how they get paid, which is why their upfront fee can look low. Some split it. None of these is inherently wrong, but you should know the terms before you agree to them.
Example: A QI charging $500 that keeps all interest on $500,000 held for four months at 4% earns roughly $6,700 from your funds. A QI charging $1,200 that returns all the interest costs you $1,200, full stop. The cheaper headline fee is the more expensive deal.
So ask every candidate whether it returns interest earned on your escrow funds, and if so, how that is calculated.
Questions to ask before you commit
These are the questions that surface everything above. Good answers come back specific, immediate, and without flinching.
Fund security:
- Where will my funds be held - which bank, which account type?
- Are client funds segregated or commingled?
- What is your fidelity bond coverage amount?
- What is your E&O coverage amount?
- How many people must approve a wire disbursement?
- What are your written disbursement procedures?
- Are your financials independently audited, and do you have a SOC report?
Cybersecurity:
- How do you verify wire instructions - phone callback, a second channel?
- Do you use encrypted email for sensitive documents?
- What training do your employees receive on business email compromise?
Experience and stability:
- How many exchanges has the firm completed, and over how many years?
- Has the firm operated through a real-estate downturn, like 2008 or 2020?
- Who will be my dedicated point of contact?
Fees and interest:
- What is your fee for a standard deferred exchange?
- Do you return interest earned on my funds, and how is it calculated?
Service:
- What is your process for deadline reminders?
- Can I reach someone on weekends and holidays?
Hesitation on any of these is itself an answer. Firms that take custody seriously will get through the whole list without difficulty.
Fund security comes first, then the firm's track record, then price. The questions in this guide are built to test all three before you sign anything, and answers that aren't clear and immediate tell you something.
Frequently asked questions
How early should I engage a QI?
At least 2-4 weeks before your expected closing, because the exchange agreement has to be signed before closing day. Scrambling to find a QI mid-escrow adds risk you don't need. For complex transactions, some investors line one up months in advance.
Can I change QIs mid-exchange?
It's technically possible but hard and potentially risky. Moving held funds between QIs raises constructive-receipt concerns. The practical answer is to choose carefully upfront rather than plan to switch.
What happens if my QI goes bankrupt?
If your funds are properly segregated in a qualified escrow account, they should be protected from the QI's creditors in bankruptcy. If they were commingled, you become an unsecured creditor, which can mean recovering cents on the dollar or nothing at all. That gap is exactly why segregation is the factor that matters most.
Is a QI the same as a title company or escrow officer?
No. Title companies and escrow officers handle the real-estate closing. The QI handles the exchange mechanics: holding funds, managing the identification paperwork, and keeping the tax-deferred structure intact. They are separate roles, and a title company already involved in your transaction cannot also serve as your QI.
Do I need a QI for a simultaneous exchange?
In a true simultaneous exchange, where both closings happen on the same day, a QI is technically not required by law. Even so, most tax advisors strongly recommend using one anyway, because even 'simultaneous' closings can have timing gaps that create constructive-receipt problems.
Are QIs regulated?
There is no federal licensing requirement for QIs. Some states have registration or bonding requirements, but regulation is generally light. That is precisely why your own due diligence carries so much weight - you can't assume a regulator has vetted the firm for you.