1031 Exchange Companies: How to Choose a Qualified Intermediary
A 1031 exchange company — formally a qualified intermediary (QI), sometimes called an exchange facilitator or accommodator — is the third party that holds your sale proceeds and papers the exchange so you never take receipt of the money. For a standard delayed exchange, using one is effectively mandatory under the IRS safe harbor in Treas. Reg. §1.1031(k)-1. Yet the industry has no federal licensing or regulation, so the burden of vetting the company that will hold your equity falls entirely on you.
This guide explains what a QI actually does, how these companies make money, and the specific safeguards, questions, and red flags to work through before you wire six or seven figures to one. It deliberately does not rank or recommend specific firms.
What a 1031 exchange company does
In a delayed 1031 exchange, the QI:
- Signs a written exchange agreement with you before your relinquished property closes.
- Is assigned into your sale contract and receives the sale proceeds directly at closing — the money never passes through your hands.
- Holds the exchange funds during the 45-day identification and 180-day exchange periods.
- Receives your written identification of replacement property by day 45.
- Disburses the funds to buy the replacement property and transfers it to you, completing the exchange you report on IRS Form 8824.
The QI’s structural job is to prevent actual or constructive receipt of the proceeds. If you touch the money — even briefly — the transaction becomes a taxable sale rather than an exchange under IRC §1031. The exchange agreement must expressly limit your rights to “receive, pledge, borrow, or otherwise obtain the benefits of” the funds before the exchange period ends (Treas. Reg. §1.1031(k)-1(g)(6)). Any cash you do keep at the end is taxable boot.
Who is disqualified from acting as your QI
Under Treas. Reg. §1.1031(k)-1(k), your QI cannot be a “disqualified person” — you, or anyone who has acted as your agent within the two years before the sale. That generally rules out your own attorney, accountant, investment banker or broker, and real estate agent (services performed solely for the exchange itself, and routine title, escrow, or trust services, are disregarded). In practice, this is why independent 1031 exchange companies exist as a distinct industry.
An industry with almost no regulation
There is no federal licensing, bonding, or capital requirement for qualified intermediaries. Anyone who is not a disqualified person can hold themselves out as a QI. Only a minority of states have stepped in with their own rules — Accruit, a national QI, lists state-level regimes in states including California (SB 1007), Colorado (HB09-1252), Idaho, Maine, Nevada, Virginia, and Washington, covering matters like bonding, fund handling, and client notifications. If your property is elsewhere, no regulator is checking on the company holding your money.
The closest thing to an industry standard-setter is the Federation of Exchange Accommodators (FEA), the national trade association for QIs. FEA membership is voluntary, but members must follow a code of ethics that specifically prohibits commingling client funds with the QI’s operating funds, and the FEA runs the Certified Exchange Specialist® (CES®) designation for experienced facilitators.
How 1031 exchange companies make money
QIs earn revenue two ways, and you should understand both before comparing quotes:
| Revenue source | How it works |
|---|---|
| Exchange fees | A flat setup/administration fee per exchange, often with add-ons for extra properties or wire transfers. Deferred.com reports an average QI fee of $800 to $1,000 and up for a standard delayed exchange, with reverse or improvement exchanges starting at about $5,000. |
| Interest on your funds (“the float”) | The QI holds your proceeds for up to 180 days. Many QIs keep some or all of the interest those funds earn. Per the same Deferred.com analysis, the majority of a traditional QI’s revenue often comes from interest earned on clients’ exchange funds — not the headline fee. |
Two implications. First, an unusually low quoted fee may simply mean the company plans to earn more on the float, so always ask who keeps the interest. Second, if you are credited interest or a “growth factor” on the exchange funds, it is taxable interest income to you under Treas. Reg. §1.1031(k)-1(h), separate from the deferred gain.
What to look for in a 1031 exchange company
The FEA’s own consumer guidance, “Ask Your Qualified Intermediary,” organizes vetting into three areas: experience and affiliations, safeguards for exchange funds, and business structure and fees. Concretely:
- Segregated accounts. Your funds should be held in a segregated account identified by your name and taxpayer identification number — never commingled with the QI’s operating funds or pooled anonymously with other clients’ money.
- Fidelity bond. Also called crime insurance; it covers claims arising from fraud or dishonesty by the QI or its employees. Ask for the coverage amount and evidence of the policy.
- Errors & omissions (E&O) insurance. Covers claims for significant errors or negligence — for example, a documentation mistake that jeopardizes a deadline. Again, ask for the amount.
- Dual-signature controls. Ask how many signatures are required to move your funds, and whether yours is one of them.
- FEA membership and CES® staff. Voluntary, but it signals commitment to the industry’s code of ethics and continuing education.
- Experience with your exchange type. A company that handles thousands of routine delayed exchanges may still be the wrong pick for a reverse exchange (which uses the separate safe harbor in Rev. Proc. 2000-37), an improvement exchange, or an exchange into a Delaware statutory trust. Ask how many transactions like yours they’ve handled in the last two years.
- Transparency about interest. A trustworthy QI will tell you plainly whether your funds earn interest, who keeps it, and where the funds are deposited.
Red flags
- Vague or evasive answers about where funds are held or whether accounts are segregated.
- No fidelity bond or E&O coverage, or refusal to show evidence of insurance.
- A fee quote that isn’t inclusive, with incremental charges revealed only later.
- Silence on who earns the interest on your exchange funds.
- Pressure to buy other services (brokerage, investments) from affiliates as a condition of the exchange.
- Any suggestion that you can take the proceeds “temporarily” and still complete an exchange — that fails the safe harbor outright.
Questions to ask before you sign
Adapted from the FEA’s consumer checklist:
- How many exchanges have you facilitated in the last two years, and how many like mine?
- Are client funds held in segregated accounts under my name and taxpayer identification number?
- How many signatures are required to release my funds, and whose?
- What are your fidelity bond and E&O coverage amounts? Can I see evidence of insurance?
- Is interest earned on my funds during the exchange — and who keeps it?
- Is the quoted fee all-inclusive, or are there incremental charges?
- Are you an FEA member? Do you have Certified Exchange Specialists®, attorneys, or accountants on staff?
Does the QI need to be local?
No. Section 1031 is federal law, so a QI does not need to be located near you or your property. Choose on safeguards, experience, and transparency rather than proximity — though if your property sits in a state that regulates QIs or imposes its own withholding rules, confirm the company knows that state’s requirements. Our state-by-state guides cover the state-level wrinkles.
Before engaging anyone, make sure your deal qualifies for a 1031 exchange in the first place, and run the numbers with a 1031 exchange calculator so you know how much the QI will actually be holding.
Frequently asked questions
For a standard delayed exchange, yes. The IRS safe harbor in Treas. Reg. 1.1031(k)-1(g)(4) treats a qualified intermediary as a non-agent so the transaction counts as an exchange rather than a sale. Without a QI (or another safe-harbor structure), taking receipt of the sale proceeds — even briefly — makes the gain taxable.
Published industry figures put the average QI fee for a standard delayed exchange at roughly $800 to $1,000 and up, with reverse or improvement exchanges starting around $5,000. Many QIs also earn interest on the exchange funds they hold, so ask both what the fee covers and who keeps the interest.
Generally no. Treasury regulations bar 'disqualified persons' from serving as your QI, which includes anyone who acted as your agent — attorney, accountant, investment banker or broker, or real estate agent — within the two years before the sale. Services performed solely for the exchange itself, and routine title or escrow work, don't count against them.
No. Section 1031 is federal law, and a QI can facilitate an exchange from anywhere in the country. Only a minority of states regulate QIs at all. What matters is fund safeguards, experience with your exchange type, and familiarity with any state-specific rules where your property is located.
You can't rely on a regulator — there is no federal oversight of QIs. Verify the safeguards yourself: segregated accounts titled with your name and taxpayer ID, a fidelity bond and errors & omissions insurance with meaningful coverage amounts, dual-signature release controls, and FEA membership with its ethics code prohibiting commingling.
Next steps
- Review the full 1031 exchange rules and timeline before you list your property.
- Check the rules and tax treatment in your state, including whether it regulates QIs.
- Estimate your deferral with the 1031 exchange calculator.
This page is for educational purposes only and is not legal or tax advice. 1031 exchanges are governed by IRC §1031 and related Treasury Regulations; consult a qualified tax professional or attorney about your specific situation. Primary sources: IRC §1031, Treas. Reg. §1.1031(k)-1, IRS Form 8824, Rev. Proc. 2000-37, FEA, “Ask Your Qualified Intermediary”.
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