Skip to content

The Qualified Intermediary

Major Topics

What Is a Qualified Intermediary?

What Is a Qualified Intermediary?

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!

Pretty cool.

Practically, you want your QI to:

But it should also:

(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:

So who should be your QI?

We’ll talk about that next.

Safe Harbor Laws

Safe Harbor Laws

Remember, the IRS insists that taxpayers use QIs when attempting a 1031 exchange.

Quick History Lesson:

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.

Taxes deferred.

What is the most important Safe Harbor?

Using a proper Qualified Intermediary.

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.

What Happens to Your Money?

What Happens to Your Money?

Here it is.

The most important part.

Remember:

You automatically fail a 1031 if you touch your money.

The LII explains.

So your QI holds the money* instead.

*In our case, we contract with an FDIC-insured bank to hold your funds in escrow

For instance, 1031x provides our clients with an Exchange Agreement…

Exchange Agreement

…that limits our client’s access…

Limitation on access to funds

…placing their funds in a “Qualified Escrow Account”…

Deposit of funds into Qualified Escrow Account.

…that requires dual authorization for any withdrawals.

Withdrawal.

signed by the Intermediary AND the Exchangor

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.

Key Takeaways

Fraud Protection

Fraud Protection

We see some awful stories where a 1031 custodian tries to run off with their clients’ money.

For example:

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.

Finding Your Intermediary

Finding Your Intermediary

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.

And read reviews from new clients.

What a wonderful theme Kava is! I’ve been exploring it more and more! Totally beneficial and easy. I loved Jet plugins family for their simplicity. I managed to create plenty of widgets!
Kianna Ferguson
CEO
What a wonderful theme Kava is! I’ve been exploring it more and more! Totally beneficial and easy. I loved Jet plugins family for their simplicity. I managed to create plenty of widgets!
Kianna Ferguson
CEO
What a wonderful theme Kava is! I’ve been exploring it more and more! Totally beneficial and easy. I loved Jet plugins family for their simplicity. I managed to create plenty of widgets!
Kianna Ferguson
CEO

Bonus Tip:

It’s OK to misspell “Sean”

He’s still your friend.

Learn to Master 1031 Exchanges

Whether you are brand new, or need an advanced strategy, this is your go-to center for Section 1031 Exchanges.

Have Questions?

Call us – (888) 899-1031
Or, send us a quick question right here   →