How to Choose a Qualified Intermediary (and What to Watch For)
11 min · Planning & Execution · Last updated
Key Takeaways
Your qualified intermediary holds your exchange funds - potentially hundreds of thousands or millions of dollars - under exchange arrangements, often via qualified escrow or trust structures. If they mismanage funds, go bankrupt, or make a procedural error, your exchange fails and your money may be at risk. QI selection is the most consequential decision in a 1031 exchange.
What a qualified intermediary does
A QI (also called an accommodator or facilitator) performs four critical functions:
- Prepares the exchange documents. The exchange agreement, assignment of purchase/sale contracts, and notices to closing agents.
- Holds the exchange funds. When your property sells, the proceeds go directly to the QI. They hold the money 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, establishing 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 facilitate the mechanics. Your CPA, attorney, and real estate agent provide the strategic guidance.
Who can and can't serve as QI
The IRS disqualifies certain people from acting as your QI. Under the "disqualified person" rules in Treasury Regulation 1.1031(k)-1(k), you cannot use:
- Your attorney (if they've represented you in the past 2 years)
- Your CPA or accountant
- Your real estate agent or broker
- Your employee
- Any family member
- Any entity you own or control
These restrictions exist to prevent constructive receipt - the IRS's concern that a related party holding your funds is effectively the same as you holding them.
The QI must be an independent, arm's-length party. In practice, this means hiring a professional QI company.
The six things to evaluate
1. Financial security and fund protection. This is paramount. Your QI will hold six or seven figures of your money. Ask: Are exchange funds held in segregated accounts (one per client) or pooled? Is the QI bonded? Do they carry errors and omissions insurance? What is their fidelity bond coverage? Have they ever lost client funds?
The strongest protection is a segregated, qualified escrow or trust account at an FDIC-insured bank, with you named as the beneficial owner. Some states require this by law; others don't.
2. Experience and volume. How many exchanges has the company facilitated? How long have they been in business? A company that handles hundreds or thousands of exchanges per year has seen every edge case. A startup QI handling their 10th exchange may miss something.
3. Responsiveness. The 45-day identification deadline is absolute. If your QI is slow to respond to calls, emails, or document requests during this window, the consequences can be catastrophic. Ask for a dedicated contact, not a call center.
4. Document quality. Exchange agreements, assignment documents, and identification letters must be precise. Errors in entity names, property descriptions, or deadline calculations can void the exchange. Ask to review sample documents before hiring.
5. Industry affiliations. Look for membership in the Federation of Exchange Accommodators (FEA). FEA members adhere to a code of ethics and are subject to peer standards. It's not a guarantee, but it's a signal.
6. State licensing/regulation. Some states regulate QIs and impose minimum bonding, insurance, and fund-handling requirements on exchange accommodators. In unregulated states, due diligence falls entirely on you.
Questions to ask before hiring
Use these questions in your QI interviews. Any reputable QI will answer them readily.
- How are exchange funds held? Segregated or pooled? At which bank?
- What is your fidelity bond and E&O insurance coverage?
- How many exchanges did you facilitate last year?
- Who will be my primary contact? What are their response time commitments?
- Have you ever had a client's exchange disqualified due to a procedural error on your part?
- What happens to my funds if your company goes bankrupt or is acquired?
- Do you earn interest on held funds? What portion, if any, is passed to the client?
- Are you a member of the Federation of Exchange Accommodators?
- Are you licensed or regulated in my state?
- Can you provide references from attorneys or CPAs who work with you regularly?
See our QI Interview Questions template for a printable version.
Red flags
- Unusually low fees. If a QI quotes $300 when the market rate is $800-$1,500, ask how they make money. Some low-fee QIs profit entirely from interest earned on your held funds.
- Pooled, uninsured fund accounts. If your funds are pooled with other clients' funds in a general operating account, they may be vulnerable in a bankruptcy.
- No E&O insurance. This is basic professional protection. Its absence suggests the company is undercapitalized or unsophisticated.
- Resistance to answering fund security questions. A legitimate QI will happily explain their fund protection measures. Evasiveness is a deal-breaker.
- No physical office or verifiable history. The QI industry has had fraud cases where operators collected funds and disappeared. Verify the company's physical presence, business registration, and track record.
National vs. local QIs
National QI companies (IPX1031, Asset Preservation, Exeter 1031, etc.) offer scale, established processes, and institutional-grade fund protection. They handle thousands of exchanges annually and have deep compliance infrastructure.
Local or regional QIs offer more personalized service and may be more accessible for questions and hand-holding. They're often run by attorneys or real estate professionals with deep local market knowledge.
Neither is categorically better. The six evaluation criteria above apply to both. A well-run regional QI with proper fund protection and strong references can be an excellent choice. A national QI with a dedicated contact and proven track record is equally sound.
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 may charge amendment fees ($150-$300) if you change your identification list within the 45-day window.
Get quotes from at least two QIs. But don't choose on price alone. The difference between a $900 QI and a $1,300 QI is meaningless relative to the six or seven figures they'll be holding.
The Bottom Line
Your QI holds your money and executes the mechanics that determine whether your exchange succeeds or fails. Evaluate them on fund security first, experience second, and responsiveness third. Ask the hard questions before signing the exchange agreement. A qualified intermediary who cuts corners on fund protection or documentation can cost you far more than the tax you were trying to defer.
Frequently Asked Questions
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