The Qualified Intermediary in a 1031 Exchange
A 1031 exchange remains valid as long as you do not take constructive receipt of the sale proceeds; if the money reaches your account, the exchange is broken. The Qualified Intermediary, or QI, is the neutral third party who receives and holds those funds on your behalf. Here's what a QI does, who cannot serve as one, and when the QI has to be in place.
What the QI does
When your relinquished property sells, the proceeds go directly to the QI, not to you. The QI holds the funds, prepares the exchange agreement, and uses the money to purchase the replacement property on your behalf. As long as you don't receive or control the funds, the exchange stays valid.
Over the life of an exchange, the QI handles four jobs:
- Prepares the exchange agreement and assignment documents for both closings
- Holds the proceeds from the sale of the relinquished property
- Receives your written identification of the replacement property within the 45-day window
- Purchases the replacement property with the held funds and transfers title to you
Who cannot serve as your QI
The IRS disqualifies anyone who has acted as your agent within the two years before the exchange. In practice, that rules out the people investors sometimes assume can handle the funds:
- Your real estate agent or broker
- Your attorney or accountant, if they have advised you on the exchange
- Your banker or anyone else who has served as your agent in the prior two years
- A related party, such as a family member or business partner
Run every exchange with the QI in place
1031 Tracker Pro™ stores your client's QI, attorney, and CPA contacts on each exchange, and tracks the deadlines they all need to hit.
Get the QI in place before closing
- The QI must be engaged before the relinquished property closes. The exchange agreement must be in place before any funds change hands
- If the sale closes first and the money touches your account, the exchange is already broken. It cannot be fixed retroactively
- The right time to choose a QI is when the property is listed for sale, not while the closing is being scheduled
- Ask about fees, whether the funds are held in a segregated account, and what happens to interest earned while the money is held
Your money sits with the QI for up to 180 days. QIs are not federally insured like banks, so choose an established company with audited financials, fidelity bonding, and a clear written policy on how your funds are held.
Run every exchange with the QI in place
1031 Tracker Pro™ stores your client's QI, attorney, and CPA contacts on each exchange, and tracks the deadlines they all need to hit.