A Qualified Intermediary (QI) helps taxpayers facilitate tax-deferred exchanges under Internal Revenue Code §1031. The formal rules for a QI are defined in Treas. Reg. §1.1031(k)-1(g)(4).
And what exactly does that mean?
The Legal Information Institute wrote a solid, technical answer.
In other words:
The QI creates legal distance between you and your 1031 transactions by
And, since you are distanced from the sale and purchase…
…you’re also distanced from the taxes!
Practically, you want your QI to:
⇒ coordinate your sale(s)
⇒ hold and safeguard your funds
⇒ coordinate your purchase(s)
But it should also:
⇒ gather all relevant information
⇒ guide you intelligently
⇒ communicate with everyone
(Picture a fiduciary or a custodian, but not quite)
The IRS also puts restrictions on who can be your QI.
To review, the following CANNOT be your QI:
× Your agent
× Your broker
× Your attorney
× Your accountant
× Your investment banker
× Your real estate agent
× Your employee
× …anyone who fit those categories in the last 2 years
So who should be your QI?
We’ll talk about that next.
Remember, the IRS insists that taxpayers use QIs when attempting a 1031 exchange.
The original Section 1031 exchanges were direct, simultaneous asset swaps between two parties.
As time passed, it got more complicated.
Third parties joined in.
New rules piled up.
Investors — and regulators — grew confused.
So, in 1991, “Safe Harbor” rules came out to clarify tax-deferred exchanges.
“Safe Harbor” is a technical term.
We like this definition by finance lecturer and CFA Adam Hayes.
Bottom line? If someone follows the Safe Harbor rules, the IRS rubber-stamps their exchange.
What is the most important Safe Harbor?
Using a proper Qualified Intermediary.
Our company, 1031x, is a “Qualified Intermediary” (“QI”)
We help investors with tax-deferred exchanges across the United States.
As a QI, we:
Let’s explore why this is so important.
The most important part.
You automatically fail a 1031 if you touch your money.
The LII explains.
So your QI holds the money* instead.
For instance, 1031x provides our clients with an Exchange Agreement…
…that limits our client’s access…
…placing their funds in a “Qualified Escrow Account”…
…that requires dual authorization for any withdrawals.
This way, the process creates legal protection for our clients’ tax deferment, but at the same time defends against other tangible threats to our clients’ proceeds.
We see some awful stories where a 1031 custodian tries to run off with their clients’ money.
In this case, “Atlantic Exchange” stole $132 million.
Atlantic Exchange was just one of many fraudulent subsidiaries of The 1031 Tax Group LLP.
It’s sickening to see.
Luckily, this bad guy got caught.
Of course, not all 1031 companies are criminal.
But some take stupid risks.
For example, LandAmerica Financial Group tried risking their clients’ 1031 funds to make outside investments.
Then 2008 happened.
LandAmerica got crushed.
And clients lost $265 million.
No bailout, either.
This (and other similar cases) lead to several U.S. states passing stricter QI laws.
For example, some new laws require the intermediary to
But that’s not all you need to know.
Your QI must also protect against external threats.
Especially wire fraud.
In fact, the latest FBI Internet Crime Report showed real estate wire fraud was $221,365,911 in 2019.
That is up from $149,458,114 in 2018.
In other words, real estate wire fraud grew 48.11% in a single year!
This is why we encrypt our communication, verbally verify each wire, and stay up to date with the latest in wire fraud protection.
We take this VERY seriously.
You should too.
How do you find a good Qualified Intermediary?
Due diligence on your end is key.
You should look for
The last part is particularly important.
If they can’t answer your questions—or don’t even answer the phone!—then how can you know they’re right for you?
Luckily, modern technology makes this easier.
As with most things, Google is a good place to start.
Here you can see the company ratings.
And read reviews from new clients.
Or returning clients.
And check to see if the QI will look out for your best interest.
Rather than just up-selling you.
It’s OK to misspell “Sean”
He’s still your friend.
We hope you enjoyed the read.
« Go Back (1031 Benefits)
« Return (Exchange Center)
Have specific questions?
Our consultations are always 100% FREE