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The Qualified Intermediary

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What Is a Qualified Intermediary?

The Qualified Intermediary

A Qualified Intermediary (QI), also known as a “1031 Exchange Accommodator”, is essential to any successful 1031 exchange. At 1031X, our team has more than 115 years of collective experience working as a Qualified Intermediary, making us an industry leader.  

We invite you to leverage that experience to ensure your next 1031 exchange is handled properly.

What Is a Qualified Intermediary?

The Treas. Reg. §1.1031(k)-1(g)(4) defines a Qualified Intermediary as a third party to a 1031 exchange transaction that “enters into a written ‘exchange’ agreement with the taxpayer” and facilitates the selling and purchasing of investment property.  It is the job of the Qualified Intermediary to limit the taxpayer’s rights to receive or obtain benefits from the proceeds from the sale of their 1031 property. In so doing, the QI allows the taxpayer the opportunity to avoid formally recognizing any income from sale that would normally be subject to taxes. 

Speaking legally, the Qualified Intermediary allows a 1031 exchange to take place by creating enough distance between the real estate transaction and the property owner.

In simpler terms, a Qualified Intermediary or an Accommodator is a company that assists investors with 1031 exchanges. Think of us as your helpful guides along your real estate investment journey. 

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

To review, the following CANNOT be your QI:

  • You
  • 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

Safe Harbor Laws

What is a safe harbor law?

The Internal Revenue Service (IRS) knows that its rules are often complex — and doesn’t have the manpower to investigate every tax return — so it offers taxpayers a form of insurance through what are known as “safe harbors”.  A safe harbor sets for a set of conditions which, if met, automatically allow a taxpayer to avoid legal or regulatory liability. 

(Source: Federation of Exchange Accommodators)

Effectively, the IRS says “so long as complete steps (A), (B), and (C), we promise not to challenge you in this specific tax area.” From a 1031 exchange standpoint, it is highly advised to be aware of and follow the safe harbor regulations.

History of safe harbor law

The safe harbor laws for 1031 exchanges were first proposed in 1991. The goal of creating these laws was to more easily determine if taxpayers who begin 1031 exchanges are in “actual or constructive receipt” of the money or property. Given how complicated the regulations are, these new safe harbor guidelines served as a solution for common issues in the mechanics of exchanges and makes delayed exchanges easier. 

Some 1031 transactions utilize every safe harbor law, while others do not use any. By and large, it is considered best practice to adhere to the safe harbor rules for 1031 exchanges. 

The most important safe harbor is the Qualified Intermediary Safe Harbor. At the creation of the IRC §1031 in 1921, an exchange was between two parties and was for like-kind property. For example, A and B would begin an exchange, and if either party needed to add some cash to equalize value, only the money received was subject to any taxes.

The goal of exchanges during this time was to enable tax deferrals on similar property transactions. Over time, it became possible for Party A to sell a property to Party B and then buy a similar property from Party C up to 180 days later. As a solution, the Department of the Treasury developed the designation of a Qualified Intermediary to aid in delayed exchanges. (We are simplifying this a great deal, of course.)

What does a Qualified Intermediary provide?

The role of a Qualified Intermediary is to step into the position of an exchanger during the real estate selling and purchasing process. Qualified Intermediaries also prevent the exchanger from accessing funds during the exchange, and make sure that all of the proper legal documentation is drafted and executed to facilitate the exchange.

By working with the right QI, you can be confident while navigating the many hurdles that 1031 exchanges present.

Following the Great Recession of 2008, some state governments chose to impose more strict regulations on 1031 exchange companies.  For example, some new laws require the intermediary to 

  • hold client funds in separate, non-commingled bank accounts
  • notify all current clients of any change in control
  • require signatures from both QI and individual clients for withdrawal of proceeds
  • maintain insurance or bonding
  • obtain license from the state authority (Nevada only)
  • receive direct supervision by an attorney or CPA (Washington only)

1031X is headquartered in Colorado, which passed their own 1031 exchange rules through the Colorado Consumer Protection Act of 2010.  We happily comply with the state regulations for Qualified Intermediaries, and go far beyond the controls required therein. 

What Happens to Your Money?

Why is a Qualified Intermediary so important?

According to the IRS, the investor cannot defer taxes if they directly sell their own property and receiving money from their sale. Instead, the investor should utilize a Qualified Intermediary to handle critical aspects of their sale and subsequent purchase.

Some of the many tasks a Qualified Intermediary must perform are:

  • Drafting the Exchange Agreement and other important documents
  • Selling the relinquished property
  • Handling the proceeds from sale
  • Purchasing the replacement property
  • Transferring the title to the new owner

Another way to think of a Qualified Intermediary is as the engine of the 1031 exchange. A few key benefits of a Qualified Intermediary in a 1031 exchange are:

  • You can be confident a QI will secure escrow of your funds in a secure position.
  • Your QI will not take any risks with your money.
  • Your QI will monitor and help you adhere to the important 1031 exchange deadlines.

Who can be your Qualified Intermediary?

The IRS strictly limits who can act as the Qualified Intermediary.  According to the IRS Fact Sheet for Like-Kind Exchanges Under Section 1031, “You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator.”

In effect, the QI should be an independent third-party without any direct relationship to the real estate transaction.  

Practically speaking, however, you should also want your Qualified Intermediary to be experienced, safe, and responsive.

Finding Your Intermediary

How to find a Qualified Intermediary?

As an investor, you must perform due diligence to locate the right Qualified Intermediary for your exchange needs. As you explore suitable intermediary options, look for factors like:

  • Appropriate experience: The Federation of Exchange Accommodators requires Qualified Intermediaries to work full time for three years before taking their Certified Exchange Specialist® (CES®) exam. While three years is a good baseline, you may wish to look for a QI with five years of experience or more. At 1031X, our leadership team boasts more than 115 years of 1031 exchange experience. 
  • Company size and reputation: If you work with an independent Qualified Intermediary and they become ill, your entire 1031 exchange may fail. By working with a larger company such as 1031X, you can be confident you have backup support for any unforeseen circumstances. If you work with an unscrupulous company, your funds may be at risk for fraud. 
  • Number of completed exchanges: You probably do not want to be the investor with whom a new Qualified Intermediary experiences their growing pains or learning curve.  Our team has completed tens of thousands of 1031 exchanges nationwide. 
  • Responsiveness: It is very, very common for investors to have sudden changes in their plans, or to only learn about a 1031 exchange on the eve of closing on their sale.  You want to make sure that you’re working with a team that always answers the phone and can adjust quickly. 
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Due diligence is key.  You should look for proof of a company’s track record, reviews, complaints, and see if you can get them on the phone to answer basic questions in a clear, professional manner. 

Choose 1031X for your Qualified Intermediary needs

If you are looking for a reliable company to serve as a Qualified Intermediary for your 1031 exchange, 1031X is here to help. Our expert team takes our role seriously and will work to ensure your exchange is successful. 

Request a free consultation today to learn more about how we can benefit your 1031 exchange!

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Working with Denise was one of the best experiences I’ve had. She was super helpful with entire process and put my mind at ease more than once. She’s extremely knowledgeable and very responsive. She was a complete joy to work with! I highly recommend 1031X. Thanks so much!
Ann Dzingle
We have used 1031X for multiple transactions and they deliver great consistent service every time. Always available, professional, knowledgeable and very prompt with anything you might need throughout the process. I put 100% trust in them with any amount of funds. Definitely a company that delivers their excellence to completion and then are there next time you need them. Thank you 1031x for helping us complete another successful transaction!
Michael Burdt
After I decided to sell the property in NC and plan to do 1031 exchange in CO. I have called few companies to inquire the details of 1031 exchange. Scott gave me very well education of the process and coach me through it. Scott is very reliable and promptly response to any email or phone calls. It's a pleasant experience to work with him. Thank you, Scott.
Eric Lin

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