How to Choose a Qualified Intermediary
Choose a qualified intermediary only after you understand two separate risks. First, the tax rules for a delayed 1031 exchange are strict: if you actually or constructively receive sale proceeds before receiving like-kind replacement property, the transaction can be treated as a sale rather than an exchange. Second, the federal tax rules do not mean the IRS has vetted the company that will hold your exchange funds.
A safety-first review should therefore focus on custody of funds, disbursement authority, financial strength, insurance, deadline discipline, and wire controls before closing. Do not treat a familiar brand name, a low fee, or a referral from a closing professional as enough due diligence for money that may sit outside your control during a time-sensitive exchange.
Start with the tax role, not the marketing label
A 1031 qualified intermediary is not the same thing as the IRS foreign-intermediary QI program used for withholding. The IRS explains that IRC Section 1031 exchanges involve an unrelated type of “qualified intermediary,” and that the QI withholding agreement does not apply to those transactions; the QI program is not responsible for overseeing that activity (IRS miscellaneous QI information).
That does not mean the intermediary is optional in every conceivable exchange structure. It means you should be precise about the job you are hiring the QI to do. In a typical delayed exchange, the QI helps keep you from receiving the relinquished-property proceeds while the replacement-property purchase is pending. IRS Chief Counsel has described one option as using a QI to hold sale proceeds until the taxpayer is ready to use those funds to acquire replacement real property, with the proceeds going directly from the buyer to the QI (IRS Chief Counsel letter 20-0030).
Your first due-diligence question is basic: will this firm sign the exchange agreement before the relinquished-property closing, receive the proceeds directly, and follow exchange documents that limit your access to those funds until the exchange is completed or otherwise released under the documents?
Confirm the written exchange agreement and disqualified-person screen
The exchange agreement is not a formality. IRS guidance says that, when a taxpayer uses a QI, the taxpayer must enter into an agreement that expressly limits the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of the proceeds held by the QI until the exchange is generally completed (IRS Chief Counsel letter 20-0030). Rev. Proc. 2003-39 similarly describes the Section 1.1031(k)-1 safe harbors for a qualified escrow account, qualified trust, or qualified intermediary, including limits on the taxpayer’s rights to the money or other property held by the intermediary (Rev. Proc. 2003-39).
Ask for the agreement early enough that your tax advisor or counsel can review it before the sale closes. The QI should also screen for disqualified-person issues. IRS Chief Counsel gives a practical example: someone who acted as the taxpayer’s investment banker or broker within 2 years of the transfer of the relinquished real property cannot be the taxpayer’s QI (IRS Chief Counsel letter 20-0030). IRS educational guidance also warns that you cannot act as your own facilitator, and that your agent or someone who has worked in listed agency capacities within the previous two years cannot act as your facilitator (IRS like-kind exchange fact sheet).
If the proposed QI is affiliated with a broker, title company, advisor, lender, or other participant, ask who is signing the exchange agreement, who owns that entity, and how the firm analyzes the two-year disqualified-person rule.
Do not ignore the federal regulatory gap
Federal tax guidance tells you how the exchange must avoid actual or constructive receipt. It does not, by itself, tell you whether a particular exchange company is financially strong, adequately insured, or operationally careful. The IRS has expressly said that the foreign QI withholding agreement does not apply to IRC Section 1031 exchange facilitators and that the IRS QI program is not responsible for overseeing this activity (IRS miscellaneous QI information).
That gap matters because exchange funds are often large and deadlines are unforgiving. IRS guidance cautions taxpayers to be careful in selecting a qualified intermediary because there have been incidents of intermediaries declaring bankruptcy or otherwise being unable to meet contractual obligations, causing taxpayers to miss strict timelines and lose Section 1031 deferral (IRS like-kind exchange fact sheet).
Your review should therefore look less like shopping for a document preparer and more like approving a temporary custodian of sale proceeds.
Require segregated accounts and disbursement controls
A QI’s strongest sales pitch is not enough. Ask how your specific exchange funds will be titled, where they will be deposited, and who can move them.
Industry due-diligence materials from the Federation of Exchange Accommodators ask whether client funds are segregated from the QI’s operating funds, whether exchange funds are held in segregated accounts identified by the client’s name and taxpayer identification number, and how many and whose signatures are required to release exchange funds (FEA, Ask Your Qualified Intermediary). Those materials are not a substitute for your own agreement, but they show the categories to ask about.
Before wiring sale proceeds, ask for written answers to these questions:
- Will my funds be held in a segregated account or pooled with other exchangers’ funds?
- What is the exact bank name, account title, and account type?
- Who can initiate, approve, and release a wire?
- How many signatures are required for disbursement, and whose signatures count?
- Will I receive bank statements or other direct account evidence?
- What happens to interest or other earnings on the account?
- What written procedure governs a changed wire instruction?
The answer should match the exchange agreement, closing instructions, and bank documentation. If those documents conflict, resolve the conflict before the relinquished-property closing.
Review fidelity bonds, professional liability coverage, and guarantees
Ask for current certificates and policy details, not just a brochure. The Federation of Exchange Accommodators materials tell taxpayers to ask for evidence of insurance, including whether the QI carries Errors and Omissions Insurance and a Fidelity Bond and what amounts apply (FEA, Ask Your Qualified Intermediary). Treat those as due-diligence categories, not a minimum standard or endorsement.
For each item, ask who is insured, what amount applies, what exclusions exist, whether exchange funds are covered, whether employee theft is covered, and how a claim would be made. If the QI mentions a parent-company or third-party performance guarantee, ask for the guarantee itself and the guarantor’s audited or otherwise reliable financial information.
Test financial strength and continuity
A failed QI can create both a money problem and a tax-timing problem. The IRS warning about intermediary bankruptcies is especially important because a taxpayer may still face the 45-day identification deadline and the final exchange deadline even when funds are tied up or delayed (IRS like-kind exchange fact sheet).
Ask whether the QI has audited financial statements, how long it has operated under its current ownership, whether it carries debt, whether it has pending claims involving exchange funds, and whether it has a written continuity plan if a key employee, bank, or technology system is unavailable near a closing deadline.
Check the deadline discipline
A good QI cannot make a bad timeline valid. IRS guidance says replacement property must be identified within 45 days after the relinquished-property sale. The replacement property must be received and the exchange completed no later than 180 days after the sale or the due date, with extensions, of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier (IRS like-kind exchange fact sheet).
Ask the QI to show the date calculation in writing. For late-year exchanges, specifically ask how the income-tax-return due date and extensions affect the final exchange deadline. A QI that talks only about “180 days” without discussing the tax-return due-date limit may be missing a critical timing issue.
Questions to ask before wiring proceeds
Use this checklist before the relinquished-property closing, not after funds are already in motion:
| Topic | Question to ask |
|---|---|
| Exchange agreement | Is the agreement signed before closing and does it limit my access to exchange proceeds? |
| Disqualified person | How did you confirm you are not my agent or otherwise disqualified? |
| Account custody | Are funds segregated for my benefit, and can I receive direct account evidence? |
| Disbursement | Is my written authorization required before exchange funds are released? |
| Insurance | What fidelity bond and professional liability coverage applies to this exchange? |
| Guarantee | Is there a parent or third-party performance guarantee, and can I review it? |
| Cybersecurity | How do you verify wire instructions, changes to wiring instructions, and signer authority? |
| Deadlines | What are my 45-day and final exchange deadlines in writing? |
| Failure plan | What happens if the bank, QI, or replacement closing has an operational failure? |
Frequently asked questions
The IRS distinguishes IRC Section 1031 exchange facilitators from the separate foreign-intermediary QI withholding program. IRS guidance says the QI withholding agreement does not apply to 1031 exchange transactions and that the QI program is not responsible for overseeing that activity. That is why fund-safety diligence matters.
No universal statement is safe. A QI is commonly used in delayed exchanges as a safe-harbor method to avoid actual or constructive receipt of proceeds, but Section 1031 structures can vary. Ask your tax advisor which structure applies before assuming a QI is or is not required.
The core risk is losing control of exchange proceeds without enough protection. IRS guidance warns that intermediary bankruptcy or failure to meet contractual obligations can cause taxpayers to miss strict exchange timelines and lose Section 1031 deferral.
Segregation is a major due-diligence item. Ask whether funds are held in an account for your benefit, whether you can receive direct bank statements, and whether disbursement requires your written authorization. Make sure the answer matches the exchange agreement and closing instructions.
For a delayed exchange, ask for the 45-day identification deadline and the final deadline. IRS guidance states that the exchange must be completed no later than 180 days after the sale or the due date, with extensions, of the income tax return for the transfer year, whichever is earlier.
Educational disclaimer
This article is for general education about 1031 qualified-intermediary due diligence. It is not tax, legal, investment, cybersecurity, banking, or insurance advice. Section 1031 outcomes depend on the exchange documents, closing mechanics, property facts, taxpayer facts, and federal tax rules. Review your exchange agreement and wiring procedures with qualified tax and legal advisors before closing.
Primary sources
- IRS, Miscellaneous qualified intermediary information
- IRS Office of Chief Counsel, letter 20-0030
- IRS, Like-Kind Exchanges Under IRC Section 1031
- IRS, Rev. Proc. 2003-39
- FEA, Ask Your Qualified Intermediary