What Is a Qualified Intermediary and Why Do You Need One?

The Qualified Intermediary is the central operational fact of a §1031 exchange. Investors often think of the 1031 as a tax provision and assume that a CPA or attorney handles it. The actual mechanics require an independent third party — the QI — to hold sale proceeds in escrow, document the exchange, and ensure the taxpayer never has access to the cash. Without that independent intermediary, the IRS treats the proceeds as having been received by the taxpayer, which makes §1031 deferral impossible.

The Constructive-Receipt Problem a QI Solves

The §1031 statute and Treasury Regulation §1.1031(k)-1 require that the taxpayer not take "actual or constructive receipt" of any sale proceeds during the exchange period. Constructive receipt means having the right to control the funds, even if you don't physically take them. If the closing wire from a sale lands in the seller's bank account — even if the seller intends to roll it into a §1031 — constructive receipt has occurred and §1031 is dead.

The Qualified Intermediary safe harbor in Treasury Regulation §1.1031(k)-1(g)(4) solves this. When proceeds flow through an independent QI's escrow account, the regulation deems the taxpayer not to have constructive receipt — provided the QI meets the regulatory definition and the exchange documents establish the QI relationship before the sale closes.

This is why every §1031 exchange must have the QI engaged before the relinquished property closes. Engagement after closing — even one minute after — does not retroactively cure constructive receipt. The wire from the title company must go to the QI's escrow account, not the seller's bank account, to keep §1031 alive.

QI Job Description (Escrow, Documents, Compliance)

A QI performs three core functions:

• Escrow management. The QI receives the wire from the title company at relinquished closing, holds the funds in a segregated escrow account, and disburses to the title company at replacement closing. The funds never touch the taxpayer.
• Document preparation. The QI drafts the exchange agreement, assignment of contract rights, identification notice templates, and closing instructions. These documents create the legal framework that satisfies the §1031(k) regulations.
• Compliance and timing. The QI tracks the 45-day identification window, the 180-day closing window, and the proper recipient of proceeds. The QI does not provide tax advice but ensures the procedural steps required by the regulations are completed.

Note what the QI does not do. The QI does not file Form 8824, does not calculate gain or basis, does not advise on whether a property qualifies, and does not provide tax, legal, or investment advice. Those functions belong to the taxpayer's CPA, attorney, and broker. The QI is a procedural service provider, not an advisor.

Treasury Reg §1.1031(k)-1(g)(4) Disqualified Persons

Not just anyone can serve as a QI. Treasury Regulation §1.1031(k)-1(g)(4) lists "disqualified persons" who cannot act as a QI for the taxpayer:

• The taxpayer's agent — anyone who has acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the exchange.
• A person related to the taxpayer under §267(b) or §707(b) — generally family members and entities the taxpayer controls.
• A person related to the taxpayer's agent.

This is why a CPA or attorney who handles other matters for the taxpayer cannot serve as the QI on that taxpayer's exchange. The two-year lookback is strict. The disqualified-person test is one of the most common failure modes in self-arranged exchanges — taxpayers retain a long-time advisor as their QI without realizing the relationship disqualifies the advisor under the regulation.

How to Evaluate a QI (Bonding, Insurance, Tenure)

Because the QI industry is largely unregulated at the federal level, the burden of due diligence falls on the taxpayer. The following criteria are the standard checklist:

• Fidelity bond coverage. A fidelity bond protects the taxpayer's exchange funds against employee theft or dishonesty at the QI. Industry-leading QIs carry $1M–$10M+ in fidelity bond coverage. Simple 1031 LLC carries $5M.
• Errors & Omissions (E&O) insurance. E&O insurance covers professional negligence in the QI's exchange documentation or process. $1M–$25M+ is the typical range. Simple 1031 LLC carries $10M.
• Escrow segregation. Best-in-class QIs hold each taxpayer's exchange funds in a separate segregated account with a major bank, not pooled in a single QI master account. Segregation protects funds in the event of QI bankruptcy.
• Operational tenure. Years of operation, total exchanges processed, and team experience all matter. The 1031 industry has had several high-profile QI failures (LandAmerica 2008, 1031 Tax Group 2007), so longevity and operational discipline are not just nice-to-have.
• State licensing where applicable. A handful of states (CA, NV, ID, WA, CO, OR) have state-level QI registration or bonding requirements. Operating in those states without the required registration is a red flag.
• Disqualified-person clearance. The QI should ask about the taxpayer's prior advisors and confirm no disqualified-person relationship exists.

What QIs Cannot Do (Tax Advice, Legal Advice)

QIs are not tax advisors, not attorneys, and not investment advisors. The QI cannot tell the taxpayer:

• Whether a particular property qualifies for §1031 treatment.
• How to compute gain, basis, depreciation recapture, or boot.
• Which replacement property to acquire or which strategy is best.
• How to file Form 8824 or any state equivalent.
• Whether the §1031 deferral will survive an audit.

Those questions belong with the taxpayer's CPA, tax attorney, and real estate counsel. A reputable QI will route those questions appropriately rather than answering them.

Simple 1031 LLC is a Qualified Intermediary. We do not provide tax, legal, or investment advice. We hold exchange funds in segregated escrow, prepare the documents required by Treasury Regulation §1.1031(k)-1, and coordinate timing with the title company and your CPA. If you need tax advice on your specific situation, your CPA is the right resource. If you need a QI, we are ready to help.

Frequently Asked Questions