A qualified intermediary (QI) is the key to a successful 1031 exchange. If you sell real property and want to defer capital gains taxes, the IRS requires that a neutral exchange intermediary step in and handle the money and paperwork.
Miss this step—or choose the wrong QI—and the exchange can fail, triggering a large tax bill.
This guide explains what a qualified intermediary does, why the role matters, how the exchange process works, and how to choose the right qualified intermediary. If you’re a real estate investor considering a tax-deferred exchange, this is the foundation you need.
Important note: This article is for educational purposes only and does not provide legal or tax advice. 1031 exchanges are governed by IRS regulations and treasury regulations. Always consult a qualified tax advisor and legal advisor before proceeding.
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What Is a Qualified Intermediary in a 1031 Exchange?
A qualified intermediary (QI)—also called an exchange facilitator or exchange intermediary—is an independent party required by the tax code to facilitate a 1031 like-kind exchange.
The QI enters into a written agreement with the taxpayer, receives the sale proceeds from the relinquished property, and uses those exchange funds to acquire the replacement property.
Why is this necessary? To avoid constructive receipt of the proceeds. If you, your agent, or a disqualified person touches the money, the exchange fails.
The QI creates a safe harbor under IRC Section 1031 so the exchange can qualify for tax deferral.
Why the IRS Requires a Qualified Intermediary
Under Internal Revenue Code Section 1031, taxpayers can defer capital gains when they exchange property held for productive use in a trade or business or for investment, for other like-kind replacement property of equal or greater value.
The IRS rules are strict. Funds from the sale of the relinquished property must be held by a third party—the QI—until the purchase of the replacement property.
This structure protects the exchange from abuse and ensures compliance with IRS rules, safe harbor laws, and treasury regulations.
The Role of a Qualified Intermediary (Plain English)
The role of a qualified intermediary is operational and compliance-focused. In practice, a QI:
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Drafts and manages the exchange agreement and exchange documents
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Receives and safeguards exchange proceeds in a qualified escrow account
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Coordinates with the closing agent, title insurance, and real estate agent
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Tracks deadlines for identification and closing
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Facilitates the exchange transaction from start to finish
A good QI is an invaluable resource who keeps the deal compliant without giving investment advice.
How a 1031 Exchange Works (Step by Step)
Step 1: Sell the Relinquished Property
You sell your investment property (the transfer of the relinquished property). At closing, the sales price proceeds are wired to the QI—not to you.
Step 2: Identify Replacement Properties
Within 45 days of the closing date, you identify potential replacement properties. Identification rules are part of the exchange rules and must be followed precisely.
Step 3: Buy the Replacement Property
Within 180 days, the QI uses the exchange funds to complete the acquisition of the replacement property. The purchase of the replacement property must meet fair market value requirements and other IRS criteria.
Step 4: Close and Complete
The QI coordinates the closing statement and ensures funds are applied correctly. If done right, you defer federal capital gains (and often state capital gains).
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Types of 1031 Exchanges a QI Can Facilitate
Forward (Delayed) Exchange
The most common structure. You sell first, then buy. Also called delayed exchanges.
Reverse Exchange
You buy the replacement property first, then sell the old one. This requires a special structure and careful timing.
Related: How Does a Reverse 1031 Exchange Work In Real Estate?
Improvement Exchange
Also known as a construction exchange. Exchange funds are used to improve the replacement property to reach the required value.
Each option has unique exchange services requirements and higher complexity—often with higher fees.
What Counts as Like-Kind Real Property?
For real estate in the United States, “like-kind” is broad. Most real property held for business use or investment can be exchanged for other real property, even in a different state. Personal residences and personal use properties generally do not qualify.
Personal property no longer qualifies under current law. Focus on investment or business real estate only.
Who Is a Disqualified Person?
A disqualified person cannot serve as your QI. This includes:
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You or your family members
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Your real estate agent, attorney, or investment adviser who worked for you recently
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Anyone with an agency relationship to you
The QI must be an independent party to preserve the safe harbor.
Exchange Funds and Security: What to Ask a QI
Your exchange funds should be held in a segregated bank account or qualified escrow account. Best practice includes:
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Dual signatures or controls
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Clear account naming
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Transparency on where funds are held
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Proof of bonding and insurance
Ask about trust services, internal controls, and whether they conduct a criminal background check on key staff.
Choosing the Right Qualified Intermediary
Not all QIs are the same. The right QI should demonstrate:
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A proven track record in the exchange industry
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Membership or alignment with the Federation of Exchange Accommodators
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Certified Exchange Specialists on staff
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Clear fees, strong controls, and responsive communication
Avoid choosing based on price alone. Experience and safeguards matter more.
Common Mistakes That Kill Exchanges
Many exchanges fail due to avoidable errors:
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Touching proceeds (constructive receipt)
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Missing the 45-day or 180-day deadlines
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Using a disqualified person
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Buying property of lesser value without planning
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Poor coordination with the closing team
A capable QI helps prevent these issues through due diligence and process discipline.
Tax Benefits and Strategic Uses
A 1031 exchange is a powerful tool for building wealth. Benefits include:
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Deferring federal and often state capital gains
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Repositioning into greater value assets
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Consolidating or diversifying holdings
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Moving into alternative investments within real estate
Over time, repeated exchanges can significantly enhance portfolio growth.
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Working With Your Advisors
A QI does not replace your tax advisor, legal advisor, or investment banker. The best outcomes happen when your team collaborates—agent, CPA, attorney, lender, and QI—each within their lane.
Final Thoughts
A qualified intermediary 1031 is essential to executing a compliant, tax-deferred exchange. The QI protects your taxpayer’s rights, prevents constructive receipt, and shepherds the transaction through complex IRS rules.
Choose carefully. With the right qualified intermediary, a 1031 exchange can be one of the most effective tools real estate investors have to preserve capital, compound growth, and upgrade their portfolios over time.