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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A qualified intermediary, or QI, helps carry out a 1031 exchange under an agreement that limits your access to the sale proceeds. Choosing one means checking more than the fee: you need to understand who handles your money, how the funds are protected, and who keeps the exchange moving. This guide gives you a practical way to compare QIs before your property sale closes.
The best time to review a QI is while you still have time to ask questions. A typical delayed exchange needs its structure in place before the transfer of the property you are selling. Receiving the sale proceeds and hiring a QI afterward does not undo the receipt of that money. [1]
Start by telling your real estate broker, attorney, CPA, and closing agent that you may pursue an exchange. Then ask prospective QIs what they need and when they need it. A sale contract can move quickly. Waiting until the closing appointment leaves little room to read the agreement or resolve an ownership issue.
I would rather compare providers with a draft sale timeline than with a wire waiting to go out. There is no prize for finding the cheapest QI while leaving the most important questions unanswered.
Under the federal safe-harbor rules, the QI enters a written exchange agreement and takes the required role in acquiring and transferring the relinquished and replacement properties. “Relinquished” means the property you give up. Direct deeds and contract assignments can be part of the arrangement; the QI does not always appear as an owner on a deed. [1]
The agreement must restrict your right to receive, pledge, borrow, or otherwise benefit from money held by the QI except as allowed under the rules. This helps address actual or constructive receipt. Constructive receipt concerns access or control, not just whether you spent the money. [1]
A QI may coordinate documents, receive identification notices, hold exchange proceeds, and send funds for the replacement closing. Ask for a written service outline. Do not assume that every provider includes the same tasks or gives the same level of advice.
The QI does not replace your CPA or attorney. Your CPA reviews tax basis, gain, liabilities, expenses, and reporting. Your attorney reviews legal rights, ownership, contracts, and unusual issues. A property or investment professional helps evaluate the replacement. The closing agent handles its own part of settlement.
Some people or firms may provide more than one service, but those roles still need to be clear. Ask who is actually engaged to advise you and what the engagement covers. A tax comment during a sales call is not the same as a written review of your facts.
Put the responsibilities on one page. Name the person who confirms deadlines, the person who approves the identification, and the person who verifies wiring instructions. Otherwise, each person may assume that someone else has handled a task that no one has finished.
The QI cannot be you or a disqualified person under the federal rules. These rules address certain agents and related parties. They can include someone who acted as your attorney, accountant, employee, investment broker, or real estate agent during the relevant two-year period. The regulation also has exceptions for specified exchange services and routine financial, title, escrow, or trust services. [1]
Do not reduce this to “anyone I know is disqualified” or “any independent company is fine.” Ownership links, prior services, and the actual relationship matter. Give your advisers the full legal name of the QI and disclose any connection you have to it.
Ask the QI to explain why it qualifies for your transaction. If the proposed provider is affiliated with an adviser or closing company, have that relationship reviewed. A familiar name can make communication easier; it does not answer the legal question.
Learn which legal entity signs your agreement. Then ask who owns it, who leads its exchange work, and who will handle your file. The parent brand, local office, and contracting company may not be the same legal entity. You want to know where responsibility sits.
Ask about experience with exchanges like yours. A straightforward sale and purchase differs from several sales, a reverse exchange, construction, or an entity with several owners. Request an explanation of the team's experience with the actual issues you have, rather than relying only on a total number of transactions.
Find out who covers the file when the main contact is away. Ask how urgent questions are escalated and when wire instructions must arrive. Good service should have a process behind it. You should not need one particular person to answer a personal phone for the exchange to keep moving.
Before signing, ask where the sale proceeds will go. Obtain the bank's name, the account arrangement, and an explanation of whose funds are recorded in that account. Ask whether funds are separated by client, combined in an account with detailed records, or held under another arrangement.
Those descriptions need support. Request the relevant contract language and a clear explanation of account ownership, recordkeeping, and access. A label such as “segregated” or “secure” does not answer every question. Ask what you will receive to confirm the deposit and track the balance.
Also ask what happens if the QI becomes insolvent or cannot operate. Your attorney can review what rights the agreement gives you and where the funds sit legally. The point is not to predict a failure. It is to understand the arrangement before a large sum enters it.
FDIC deposit insurance protects covered deposits when an insured bank fails. It is not general insurance against a nonbank company's failure to meet its obligations. When a third party places funds at a bank, the account structure and required records affect whether pass-through coverage applies. Do not assume the QI's entire balance is protected because the bank is insured. [2]
Ask the bank and QI to explain the coverage that would apply to your funds, including any other deposits that must be counted together. Get help reviewing large balances or arrangements using several banks. The correct answer depends on more than an FDIC logo.
Then review other protection separately. A fidelity bond, errors-and-omissions policy, or cyber policy may address different events. Ask for the limits, exclusions, deductible, insured entity, and whether the limit is shared across claims. A certificate is useful evidence, but it is not proof that every possible loss is covered.
Ask who can authorize a transfer and who checks it before release. Does the process require more than one employee? How are recipients verified? Can one person change the bank instructions and approve the same payment? What alerts or records will you receive?
Discuss these controls without trying to give yourself unrestricted access to the proceeds. The tax rules limit your rights over exchange money. A process for reviewing a proposed payment is different from a right to withdraw or borrow the funds whenever you wish. Have the QI and attorney explain how the controls fit the exchange agreement. [1]
A good answer should describe the steps, the responsible people, and the record left behind. “We have never had a problem” does not tell you what will prevent the next one.
Fraudulent wire requests can look like ordinary messages from a trusted company. The FBI describes scams that use look-alike addresses or compromised accounts, including false real estate closing instructions. A correct-looking email thread is not enough to prove that new bank details are genuine. [3]
Set up the verification process early. Confirm the contact and phone number through a source you trust, not the suspicious message itself. Verify payment requests and any change in account details through that separate channel. Be especially cautious when a message adds urgency or asks you to avoid calling.
Ask the QI how it handles changed instructions, last-minute requests, and identity checks. Use strong account security, including multifactor authentication where available. If a transfer appears fraudulent, contact the financial institution immediately and report the matter to the FBI's Internet Crime Complaint Center. Fast action may help, but recovery is not guaranteed. [3]
Request a written fee schedule for your whole transaction. Ask about the base exchange fee, extra properties, additional wires, document changes, extensions of service, canceled transactions, and unusual work. If the exchange may involve several purchases, ask for a quote that reflects that plan.
Then ask who receives interest earned while the proceeds are held. How is the rate set? Can it change? Are there bank charges or other deductions? A low stated fee may not be the lowest total cost if the interest arrangement differs.
Interest and growth factors in an exchange have their own tax treatment and access restrictions. Having interest credited does not mean you can freely withdraw it during the exchange. Ask the QI how it will report amounts and give the records to your CPA. [1]
Cost matters, but it should sit beside fund controls, experience, responsiveness, and contract terms. The exchange may involve far more money than the difference between two service quotes.
In a standard delayed exchange, the identification period ends at midnight on the 45th day after the transfer. The exchange period ends on the earlier of day 180 or the relevant federal return due date, including extensions. If one exchange includes several sales on different dates, the earliest transfer generally starts these periods. [1]
Ask for the actual dates in writing. Have your CPA confirm whether the tax-return deadline affects the exchange. Also ask which time zone the team uses operationally and what earlier cutoff it needs for documents and wires. Do not confuse a bank's cutoff or office schedule with the legal deadline.
Ordinary deal delays do not grant extra time. Specific IRS disaster relief may apply to an eligible transaction, but the notice and its conditions must be checked. Ask who monitors such an issue and who confirms eligibility if one arises. [4]
Ask whether the QI supplies a form, who reviews the property descriptions, and how receipt is confirmed. Identification generally requires a signed written document sent to a permitted recipient within the period. A saved listing or an unsigned draft is not the same thing. [1]
The replacement list must fit the applicable property-count or value rules. Have the QI review the complete list, including prior purchases within the identification period and any written revocations. For a DST portfolio or a fractional interest, ask how the property is described and counted.
There is an important difference between reviewing the form and approving the investment. A QI can help with identification requirements without deciding whether a property's price, lease, or sponsor fits you. Confirm what the review does and does not cover.
Ask your attorney to review the agreement while there is still time for questions. Focus on the contracting parties, restrictions on funds, allowed investments of cash, fees, interest, release conditions, liability terms, dispute provisions, and what happens if the exchange fails.
Pay special attention to the promises you are relying on. If a salesperson describes a separate account, approval process, or form of coverage, find where that promise appears in the documents. Resolve any mismatch before funds move.
Also confirm the assignment and notice steps needed for the sale and purchase contracts. The regulations provide ways for the QI to perform its role through assignments when the required notice is given on time. That is one reason to involve the closing team early instead of treating the QI as only a place to park cash. [1]
You may change your plans, lose a deal, or decide that no replacement makes sense. Ask how the agreement handles that outcome before it happens. The safe-harbor restrictions can prevent the QI from releasing money whenever you request it.
For example, the rules allow certain release provisions when no replacement has been identified by the end of the identification period. Different conditions apply when property has been identified. Do not assume you can cancel on any day and receive the proceeds immediately. The agreement and your actual facts need review. [1]
Your CPA should also assess the tax year and character of the gain when an exchange is not completed. An unsuccessful exchange is not a reason to improvise the reporting. Keep the documents and ask for a calculation based on what actually occurred. [5]
A simple comparison sheet is more useful than several sales brochures. Use columns for each QI and rows for the same questions. Record the legal entity, assigned team, account structure, bank, fund controls, insurance evidence, fees, interest, response process, and experience with your transaction.
Add a column for the source of each answer. Mark whether it came from the agreement, a bank document, an insurance document, or a conversation. This makes it easier to see which points are supported and which still need confirmation.
Do not turn the sheet into a score that hides a serious weakness. Strong service cannot fix an ineligible intermediary. A low fee cannot fix unclear fund rights. A large company still needs a capable person and a clear process for your file.
Before the sale closes, hold a brief coordination call or exchange a written checklist with the QI and closing team. Confirm that the agreement is signed, the required assignments and notices are complete, and the proceeds are directed correctly. Verify the legal owner and taxpayer information with your advisers.
After closing, obtain confirmation of receipt and a balance record. Reconcile the proceeds with the closing statement. Put the identification and completion dates on your calendar, and keep a copy of each document you send. Ask for acknowledgment of time-sensitive submissions.
For each replacement, confirm the funding amount, bank cutoff, closing requirements, and person authorized to resolve a problem. A plan is stronger when the handoff has a named owner and a completion record. That is the level of clarity I would want when an exchange involves a major part of someone's wealth.
Imagine you are comparing two QIs for the sale of a rental building. One quote has a lower base fee. The other has a higher fee but explains the bank arrangement, wire controls, assigned team, and charges for each replacement closing in writing. You still need to examine both contracts. The first quote may simply leave out information that you have not yet requested.
Now assume you expect to buy three replacement interests. Ask both firms to quote that same plan. Include all three closings and the expected time that funds will be held. Ask how they would handle one purchase failing after identification. You can now compare the same service rather than two headline prices.
Suppose one answer remains unclear: who can authorize a change to the receiving account? Mark it unresolved. Do not fill that gap with an assumption based on the company's size or reputation. Ask for the process and have the right adviser review it.
The purpose of this exercise is not to name a universal winner. It is to identify which provider can support your actual exchange with terms and controls you understand. Choosing becomes easier when the open questions are visible.
Possibly not. The disqualified-person rules address specified services during the relevant two-year period, with defined exceptions. Have the relationship reviewed under the regulation rather than assuming that a trusted adviser is eligible. The same person can still help with tax or legal advice without serving as QI. [1]
Not in every arrangement. The regulations permit certain assignments and direct transfers that satisfy the QI's acquisition and transfer role. The necessary agreements and notices still matter. Ask the QI and attorney how the documents fit the actual closing. [1]
Do not expect that to repair the transaction. Actual or constructive receipt can turn the proposed exchange into a sale or cause gain recognition. Get a qualified tax adviser to review what happened immediately. The usual plan is to arrange the exchange before closing. [1]
No. Deposit insurance has limits and conditions, and it addresses an insured bank's failure. It is not a blanket guarantee of the intermediary's performance. Confirm the account ownership, records, coverage, and other risks with the bank and your advisers. [2]
A provider's involvement does not settle every tax issue. Your property use, ownership, timing, identification, money flows, and other facts matter. Ask what the provider is agreeing to do, and obtain tax advice about the full transaction. A well-run process and a qualifying tax result are related but distinct questions.
Verify the change through a separately established contact method before acting. Do not rely on the reply address or phone number in the new message. The FBI warns that criminals can imitate trusted parties or use compromised email accounts to redirect payments. [3]
You can decide not to buy, but the timing of a release is controlled by the agreement and applicable restrictions. It is not necessarily immediate. Discuss the release process and tax consequences with the QI and CPA before making that decision. [1]
Bring the property address, seller's legal name, ownership structure, expected closing date, sale contract if available, and a rough replacement plan. Explain related parties, multiple properties, or unusual facts early. Accurate information at the start is more useful than a rushed correction after the sale closes.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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