#qualified intermediary

A qualified intermediary's core job in a 1031 exchange isn't paperwork, it's custody. The moment your relinquished property sells, the proceeds have to go to the qualified intermediary, not to you directly, or the exchange is disqualified entirely. Understanding how that custody actually works is worth doing before you select one, not after your funds are already in someone's hands.

Step 1: Understand Why You Can't Touch the Funds

The IRS rule is specific: if you receive the sale proceeds, even briefly, even with every intention of reinvesting them, the exchange is disqualified, sometimes called "constructive receipt." This is why the qualified intermediary exists structurally, they hold the funds in an account you don't have direct access to, satisfying the requirement that you never actually control the money between the sale and the eventual purchase.

Step 2: Ask How the Funds Are Actually Held

Qualified intermediaries vary in how they structure custody. Some hold funds in a segregated account specific to your exchange. Others may commingle exchange funds across multiple clients in a single account with internal accounting to track individual balances. This is a genuinely important topic to raise directly: a segregated account generally offers more protection if the intermediary itself runs into financial or legal trouble, since your funds aren't mixed with a pool that creditors might have claims against.

Step 3: Ask About FDIC Coverage and Where the Account Actually Sits

Since exchange funds are typically held at a bank, it's worth asking which institution, and whether the funds are within FDIC insurance limits or structured across multiple accounts to stay under those limits if your exchange involves a large sum. A qualified intermediary handling a transaction well above standard FDIC coverage limits should have a clear answer for how they address that exposure, and it's a fair question to ask directly rather than assume is handled.

Step 4: Ask About Fidelity Bonds and Errors and Omissions Insurance

Reputable qualified intermediaries typically carry fidelity bonds (protecting against employee theft or fraud) and errors and omissions insurance (protecting against mistakes in handling the exchange). Asking to see evidence of both, rather than taking a verbal assurance, is a reasonable request given how much is riding on the funds being handled correctly.

Step 5: Understand What Happens If the Exchange Falls Through

If your exchange doesn't complete, a replacement property can't be identified or acquired in time, it's worth understanding in advance how and when funds get released back to you, and what tax consequences follow from that. This is a topic worth clarifying with both your qualified intermediary and your tax advisor before you're in that situation, not while you're already there.

Step 6: Understand the Difference Between a Qualified Intermediary and a Financial Advisor

It's worth being clear on the distinction: a qualified intermediary's role is narrowly defined around facilitating the exchange mechanics, holding funds, documenting identification, coordinating closings. They're generally not providing tax advice or investment recommendations as part of that role, even though they're deeply involved in the transaction. A separate tax advisor, and potentially a financial advisor if the replacement property decision intersects with broader portfolio planning, fills a different role. Understanding which professional is responsible for which part of the transaction avoids a gap where everyone assumes someone else is covering a specific question.

Step 7: Ask About Their Track Record With Exchanges of Your Size and Type

A qualified intermediary who primarily handles small residential exchanges may have different systems and experience than one built around larger commercial transactions, or one with specific experience in DST-related exchanges. Asking directly about their typical transaction size and type, and how many exchanges they facilitate annually, gives you a sense of whether their operational experience actually matches what your transaction needs.

Step 8: Ask What Reporting You'll Receive While Funds Are Held

During the weeks or months between your relinquished property closing and the replacement property purchase, ask what reporting or statements the qualified intermediary provides showing your funds are still there and accounted for. Regular, clear reporting during the holding period is a reasonable expectation, and a qualified intermediary who's vague or resistant about providing it is worth treating as a caution flag rather than dismissing as a minor inconvenience.

What a Well-Run Qualified Intermediary Relationship Looks Like

A qualified intermediary who handles custody well tends to communicate proactively, confirming receipt of funds, sending periodic statements without being asked, and being clearly reachable for questions during the holding period rather than only during the transaction's key milestones. Comparing how responsive and transparent a prospective intermediary is during your initial conversations is a reasonable, low-cost way to get a sense of what working with them during the actual holding period will feel like.

A Question Worth Asking About Succession

A less obvious question worth raising: what happens to your funds and your transaction if the qualified intermediary firm itself experiences a major disruption during the holding period, a key employee departure, an acquisition, or a business closure. Established firms generally have procedures for exactly this scenario, but asking about it directly, and understanding whether your funds' custody is structured in a way that survives a disruption at the firm level, is a reasonable question given how much can be riding on that custody arrangement for an extended period of time, sometimes several months from the initial closing to the final purchase, and a firm that can answer this question clearly and without hesitation is generally a good sign about how seriously they take custody more broadly, not just in a worst-case scenario that may never actually happen. Vague or evasive answers to a direct question like this one are worth weighing seriously before committing funds to that specific intermediary, regardless of how well they've handled every other part of the conversation up to that point.

Why This Matters More Than People Initially Assume

It's easy to focus entirely on the tax mechanics of a 1031 exchange, the identification rules, the deadlines, the like-kind requirements, and treat the custody of the funds themselves as a minor administrative detail handled automatically in the background. In practice, the qualified intermediary is holding what's often a significant sum for weeks or months with limited regulatory oversight compared to, say, a bank or a registered investment advisor. Understanding exactly how that custody works, and asking the questions above before you commit to a specific intermediary, is time well spent given what's actually at stake.

Verifying Who You're Actually Working With

Before selecting a qualified intermediary, some baseline due diligence is worth doing regardless of how the referral came about: how long they've been operating, whether they're a member of an industry association like the Federation of Exchange Accommodators, and whether any complaints or legal actions show up in a basic search. None of this replaces a direct conversation about custody procedures, but it's a reasonable first filter before that conversation happens.

A qualified intermediary is not optional in a 1031 exchange. The rules require exchange proceeds to pass through a QI rather than the exchanger's own hands, and the QI you pick will be holding your sale proceeds for weeks or months while the replacement property gets sorted out. Picking one deserves more scrutiny than most people give it.

Here is a walkthrough of the questions worth asking before you sign an exchange agreement with any QI, organized in the order they usually come up.

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Step 1: Ask How Exchange Funds Are Held

Start with custody. Ask whether your exchange proceeds will sit in a segregated account specific to your transaction, or a commingled account pooled with other clients' funds. Ask what bank the funds are held at, and whether that account is insured and to what limit.

The Federation of Exchange Accommodators publishes background on industry standards for how exchange funds should be safeguarded, which is a useful reference point for evaluating whether a QI's answers line up with common practice.

Step 2: Ask About Insurance and Bonding

Beyond how funds are held, ask what insurance coverage or fidelity bond protects the funds against fraud, theft, or the QI's own insolvency. Ask for the actual coverage amount, not just confirmation that "we're insured." A QI holding proceeds well above their coverage limit is a meaningful risk worth understanding upfront.

Step 3: Ask How Long the QI Has Been in Business and Under What Ownership

QIs are not licensed or regulated the same way securities professionals are, which makes track record and stability more important to evaluate directly. Ask how long the company has operated as a QI, whether ownership has changed recently, and whether the company is independent or affiliated with a title company, bank, or law firm.

An affiliation is not automatically a red flag, but it is context worth having, especially if the affiliated entity is also involved elsewhere in your transaction.

Step 4: Ask What Happens if the QI's Business Fails Mid-Exchange

This is an uncomfortable question to ask, but it matters. Ask specifically what protections exist if the QI's business runs into financial trouble while holding your funds. Some QIs carry specific fidelity coverage for exactly this scenario; others do not, and the answer affects how much risk you are accepting by using them.

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Step 5: Ask About Their Experience With Your Specific Replacement Property Type

If a Delaware Statutory Trust interest is a possible replacement property, ask whether the QI has experience coordinating exchanges into DST offerings specifically. DSTs, regulated as securities by the Securities and Exchange Commission, have subscription timelines and paperwork requirements that differ from a directly owned property, and a QI unfamiliar with that process can introduce delays during an already tight window.

Step 6: Ask About Their Process for the 45-Day Identification Requirement

Ask exactly what format the QI requires for the formal identification of replacement property, how far in advance of day 45 they recommend submitting it, and what happens if a submission arrives close to the deadline. Some QIs have specific submission portals or notarization requirements that take extra time to navigate for the first time.

Step 7: Ask for References From Recent Clients

Ask for two or three references from exchanges completed in the past year, ideally ones involving a similar property type or transaction size to yours. A QI that has handled hundreds of exchanges should be able to provide this without hesitation.

Step 8: Ask How They Handle Amendments to the Identified Property List

Plans change, and sometimes the identified replacement property falls through before closing. Ask what the process looks like if you need to substitute a different property from among those originally identified, and how quickly they can turn around updated paperwork if a deal is moving fast. A QI that treats amendments as routine, with a clear documented process, is generally easier to work with under pressure than one who has to figure it out as they go.

Step 9: Ask What Reporting You Will Receive During the Exchange

Ask how often you will receive account statements or confirmations while funds are in the QI's custody, and through what channel. Waiting weeks between updates with no visibility into your own funds is a reasonable thing to want to avoid, especially for a larger exchange where the proceeds represent a meaningful share of your net worth.

Step 10: Confirm Fees and What They Cover

Ask for a complete fee schedule in writing, including any charges for multiple identified properties, amendments, or an extended timeline. Compare the total cost, not just the headline fee, across a few different QIs before deciding.

Step 11: Ask How They Communicate During Time-Sensitive Windows

Ask what the QI's typical response time looks like during the identification and closing windows specifically, not just in general. A QI that takes two days to respond to routine emails might be perfectly fine during the slower stretches of an exchange but genuinely problematic if that same response time applies the week your identification is due or the day before a closing.

Some QIs designate a specific contact or an expedited channel for time-sensitive requests during these windows. Asking about this upfront, rather than discovering the answer under pressure, is a reasonable thing to want clarity on.

Step 12: Ask What Happens if You Need to Extend or Modify the Exchange Agreement

Occasionally circumstances require modifying the exchange agreement itself, whether because a closing date shifts, an additional party needs to be added to the replacement property title, or another unexpected wrinkle comes up. Ask how the QI handles these modifications, what documentation they require, and roughly how long the turnaround takes.

A Note on Cost Versus the Cheapest Option

It is worth resisting the urge to pick a QI based purely on the lowest fee. The fee difference between QIs is usually small relative to the size of the exchange proceeds being held, and the more important variables are custody practices, insurance coverage, and experience with your specific transaction type. A QI charging slightly more but offering segregated accounts and clear fidelity coverage is generally the better value than the cheapest option on the list.

Putting It All Together

None of these questions have a single right answer that applies to every exchanger. What matters is asking them before signing an exchange agreement, not after funds are already in the QI's custody. A QI who answers these questions clearly and specifically, without hedging, is generally a better sign than one who gives vague reassurances.

For a broader look at how QI selection connects to the tax mechanics of the exchange, including how the QI's process helps prevent accidental boot, see Understanding Boot in a 1031 Exchange: What to Review With Your Advisor.

To verify the licensing status of any securities professional involved if a DST option is on the table, FINRA maintains a free public lookup tool worth checking before relying on their recommendation.

For more on coordinating a tax advisor and a qualified intermediary during a transaction like this, this educational resource on advisor coordination is available at capivise.com.

A 1031 exchange involves at least two professionals whose roles are different but whose work has to align: the tax advisor (who handles the federal and state tax mechanics and the strategic framing) and the qualified intermediary (who holds the proceeds, manages the formal documentation, and enforces the timing). When the two are aligned, the exchange runs smoothly. When they are not, the gaps tend to show up at the worst possible moment.

This is an educational walkthrough of how the two roles fit together and the topics worth raising in each conversation. Nothing here is tax, legal, or investment advice. The specifics of any 1031 exchange require professionals familiar with the investor's transaction.

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The tax advisor's role

The tax advisor handles the federal and (where relevant) state tax framing of the exchange. The work usually includes:

Confirming that the proposed transaction structure qualifies under Section 1031.

Identifying the day-one date for the 45-day and 180-day clocks.

Walking through the consequences of partial completion or boot.

Coordinating with the investor's broader tax position, including the interaction with the year's tax return due date.

Reviewing state-level conformity and any additional reporting requirements.

The tax advisor is not typically the party holding the proceeds or managing the documentation; that role belongs to the qualified intermediary. But the tax advisor is the source of the strategic framing that the rest of the team executes against.

For the regulatory background that informs the tax advisor's work, the IRS is the primary federal source. For state-level treatment, the relevant state department of revenue is the authoritative reference.

The qualified intermediary's role

The qualified intermediary (often called a QI) is the third party that holds the proceeds of the relinquished property and effects the formal transfer to the replacement property. The QI's role is operational and documentary:

Drafting and managing the exchange agreement.

Holding the proceeds in segregated accounts during the exchange.

Receiving the formal written identification by day 45.

Coordinating the disbursement of funds to the replacement property closing.

Documenting the exchange for the investor's tax records.

The QI is not the tax advisor and does not provide tax advice. The QI's role is to enforce the timing and the documentation that the tax advisor has framed.

For broader educational background on QI practices and industry standards, the Federation of Exchange Accommodators is the industry trade association.

Where the two roles overlap

A few specific points where coordination matters.

The day-one date. Both the tax advisor and the QI need to be using the same day-one date for the 45-day and 180-day clocks. Mismatches here are unusual but consequential. Confirming the date in writing, before the relinquished property closes, is the cleanest approach.

The identification documentation. The QI receives the formal identification, but the tax advisor often reviews the candidate properties before identification is delivered. The two should be working from the same property list.

The disbursement schedule. When the replacement property closes, the QI funds the closing from the held proceeds. The timing has to align with the closing schedule, which the tax advisor may have informed during the contract negotiation.

The contingency plan. If the timeline slips, the tax advisor and QI together can walk through the options for partial completion or substitution within the identified list. Each party brings part of the analysis.

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Topics to raise with the tax advisor

A short list of educational topics. None of these is advice; each is a topic the investor can raise in the conversation.

What date will be used as day one for the 1031 clocks? Confirming this avoids ambiguity later.

Are there installment or deferred-transfer elements that would shift the day-one date? Non-standard transaction structures can move the date.

Will the tax return due date constrain the back end of the 180-day window? For late-year closings, this often matters.

What state-level conformity applies? Most states conform to federal treatment, but specifics vary.

What are the consequences of partial completion? Understanding the boot mechanics in advance is part of the educational framing.

Topics to raise with the qualified intermediary

Distinct from the tax advisor conversation. Topics that come up in the QI conversation:

What is the cutoff time for identification submissions? Some QIs have business-hours cutoffs that effectively shorten the 45-day window by a few hours.

What is the procedure for disbursing funds to the replacement property closing? Understanding the operational sequence reduces stress at the closing.

What happens if the exchange does not complete within 180 days? The QI's procedure for the contingency case is worth understanding in advance.

Are the proceeds held in segregated accounts? This is industry-standard, but worth confirming for the specific QI.

What documentation will the QI provide for the investor's tax records? The post-exchange documentation is what the tax advisor will use for reporting.

How the conversations sequence

In a typical educational framing, the conversations happen in this order.

First, an exploratory conversation with the tax advisor before the relinquished property is under contract. The advisor confirms the structure qualifies, walks through the timing, and identifies the key date and topic items.

Second, the QI is selected (often on the advisor's recommendation) and onboarded before the relinquished property closes. The exchange agreement is drafted and signed.

Third, after the relinquished property closes (day one), the candidate replacement property list is developed in coordination with the tax advisor, and the formal identification is delivered to the QI by day 45.

Fourth, the replacement property closing is coordinated through the QI for funding, with the tax advisor available for any structural questions that come up in the closing prep.

Fifth, after the exchange completes, the tax advisor handles the reporting on the investor's federal (and state) return.

Each handoff is small if the team is aligned. Each handoff is friction if the team is not.

The educational role of a broader advisor framework

For investors coordinating multiple advisors across a complex real estate transition, the educational framing of how to select and coordinate the team is often what determines whether the substance of each professional conversation can be focused on the substance rather than rebuilding the framework.

The educational material at Capivise covers topics that come up in these multi-advisor transitions, including the Capivise advisor match overview page that walks through the educational framework for advisor selection. For the longer educational write-up on the 180-day exchange period and the topics worth raising with each advisor, the in-depth piece on the 180-day window goes through the structure in detail.

For broader regulatory and educational material, the SEC investor education site and FINRA both have stable, federally-maintained pages that pair with the federal tax framework on the IRS site.

A short close

The tax advisor and the qualified intermediary are different roles with different work. Coordinating them, before the day-one date is set, is the educational point that this piece is making. Investors who walk into the transaction with the team aligned are in a different operational position than those who are figuring out the handoffs mid-window.

Nothing here is advice. The specifics of any 1031 require the investor's own professionals familiar with the facts. The goal of this educational walkthrough is to help an investor frame the right questions for each conversation, so the substance of the exchange can be the focus rather than the framing.

A 1031 exchange is mechanically a real estate transaction with tax-deferred structure layered on top. The mechanics are handled by a qualified intermediary (QI). The structure is reviewed and reported by a tax advisor. The two professionals do different work, and getting their work to fit together is part of how the exchange stays on track.

This is an educational walkthrough of how to coordinate the QI and tax advisor roles during a typical 1031 exchange. It is general guidance; specific transactions require advisor review for the facts that apply.

What the qualified intermediary actually does

The QI is the entity that holds the proceeds from the sale of the relinquished property between the closing of that sale and the closing of the replacement property purchase. Under Treasury Regulations, the taxpayer cannot have actual or constructive receipt of the proceeds during this period; the QI's role is to hold the funds and disburse them at the replacement closing.

In addition to holding funds, the QI typically:

Prepares the exchange agreements that document the transaction as a like-kind exchange rather than two separate transactions.

Receives the identification of replacement property within the 45-day window.

Coordinates with the closing agents on both sides of the transaction.

Disburses funds to the replacement property closing at the right time.

Provides closing-out documentation the taxpayer needs for tax reporting.

The QI is not a tax advisor. The QI cannot give advice on whether a particular property qualifies as like-kind, whether the held-for-use requirement is met, whether the exchange will achieve the tax outcome the taxpayer expects, or any other substantive tax question.

What the tax advisor actually does

The tax advisor (typically a CPA, enrolled agent, or tax attorney) handles the substantive Section 1031 analysis:

Confirms that the relinquished property qualifies under Section 1031.

Confirms that the proposed replacement property qualifies as like-kind.

Reviews any complications (DST sponsor documentation, mixed-use issues, state conformity).

Calculates the realized gain and any recognized gain (from boot).

Determines the basis of the replacement property.

Prepares the necessary tax reporting on IRS Form 8824 and any state-level returns.

The tax advisor's work spans before, during, and after the exchange. Before the exchange: structural analysis and planning. During the exchange: confirming that identifications and substitutions stay within the rules. After the exchange: reporting and basis tracking that may affect tax returns for years to come.

How the coordination works in practice

The two professionals work in parallel, with handoffs at specific points:

Pre-exchange phase. The tax advisor confirms the structural fit (does this exchange make sense?) and the basic eligibility (does the relinquished property qualify? are the proposed replacement categories like-kind?). The QI is engaged once the structural decision is made; the QI's onboarding includes signing exchange agreements that document the transaction as a 1031 exchange.

Identification window (days 0-45 after relinquished sale). The QI receives the formal identification of replacement property. The tax advisor reviews the identified properties to confirm they meet the like-kind and held-for-use standards. If any identified property has issues, the tax advisor flags them while time remains to make substitutions within the 45-day window.

Exchange window (days 45-180). The replacement closing happens. The QI disburses funds at closing. The tax advisor remains available for any structural questions that arise (financing changes, sponsor document updates for DSTs, etc.).

Post-closing. The QI provides closing-out documentation. The tax advisor prepares Form 8824 and any state-level reporting. The taxpayer's basis in the replacement property is established and tracked going forward.

Where coordination breaks down

A few common patterns where the QI/tax advisor coordination fails:

QI is engaged without tax advisor review of the structure. The taxpayer signs exchange agreements that lock in the like-kind structure before confirming the relinquished property qualifies. If the tax advisor later determines the property doesn't qualify, the exchange has to be undone, which is expensive and creates complications.

Identification is filed without tax advisor input. The taxpayer identifies replacement property based on real estate or financial considerations and doesn't have the tax advisor confirm like-kind status. By the time the issue surfaces, the 45-day window has closed and substitution isn't possible.

Tax advisor isn't kept in the loop on changes. A financing change at the replacement property, a substitution within the 45-day window, an unexpected DST sponsor document update. Any of these can affect the tax analysis, but the QI is focused on the mechanics, not the substance, and the tax advisor only learns about them after the fact.

Tax advisor isn't consulted on basis tracking after closing. The basis of the replacement property carries over from the relinquished property with adjustments. If the carryover isn't documented carefully, later questions (depreciation, future exchanges, eventual disposition) become harder to answer.

How to set up the coordination properly

Practical steps an investor can take:

Engage the tax advisor before the QI. Confirm the structural analysis is sound before the QI starts the mechanical work.

Have the tax advisor review the QI selection. Not all QIs are equal; bonding levels, segregated funds practices, and the QI's response time during the windows all matter.

Include the tax advisor in the identification decision. The QI receives the formal identification, but the tax advisor should review the proposed properties first.

Set up a communication channel that includes both professionals. A shared email thread, a project management tool, or a simple weekly check-in during the exchange window keeps both sides informed of changes.

Schedule post-closing reporting work. The tax advisor's role doesn't end at closing; the reporting and basis-tracking work continues.

How the QI is selected (and why this matters for coordination)

QIs are not federally licensed in the way some other professionals are. The QI industry has a trade association, the Federation of Exchange Accommodators, which maintains a code of ethics and a database of member QIs. Membership is not a substitute for due diligence, but it is a useful starting point.

Topics to clarify when selecting a QI:

Bonding and insurance levels.

How exchange funds are held (segregated account vs. commingled).

Track record on identification deadlines and 180-day closings.

Communication practices during the windows.

Whether the QI is independent or affiliated with a broker, attorney, or title company.

A tax advisor experienced with 1031 exchanges typically has views on QI selection. Asking the advisor for their preferred QIs is reasonable; selecting a QI without advisor input is less so.

For an educational walkthrough of like-kind property requirements and the topics to clarify with a tax advisor, the educational guide at Capivise (here) on Like-Kind Property Requirements in a 1031 Exchange covers the substantive conversation that should precede QI engagement.

What happens if the QI fails

QI failure is rare but not unheard of. A QI that goes bankrupt during the exchange can put the taxpayer's funds at risk. Topics worth discussing with both the tax advisor and the QI before engagement:

Whether the QI segregates exchange funds in separate accounts (some do, some don't).

What happens to funds if the QI declares bankruptcy.

Whether the QI carries bonding or insurance that covers loss of funds.

What state-level regulations apply to QIs in the relevant jurisdictions.

The American Institute of CPAs and the National Association of Personal Financial Advisors both have general material on professional due diligence that applies here. The QI selection is sometimes treated as a back-office detail; for larger exchanges, it deserves more attention.

What the SEC Investor.gov tools cover

For DST replacement property, an additional professional is involved: a securities-licensed representative who sells the DST. The SEC Investor.gov resource covers general principles for evaluating investment professionals, and FINRA BrokerCheck lets investors verify the registration status of securities-licensed representatives.

This is a separate due diligence track from QI selection and tax advisor selection. The DST sponsor's track record and the offering documents matter; the selling representative is the intermediary between the sponsor and the investor.

Why coordination matters more for larger or more complex exchanges

A simple rental-to-rental exchange between two states with reasonable conformity might involve light coordination work. The tax advisor confirms eligibility, the QI handles the mechanics, the tax advisor reports. Coordination overhead is low.

A multi-state exchange with DST replacement property, or an improvement exchange where construction happens during the 180-day window, or an exchange involving California claw-back considerations, involves more moving pieces. The coordination overhead scales with complexity, and the cost of getting the coordination wrong scales similarly.

For complex exchanges, scheduling a kickoff meeting with the tax advisor, the QI, and any other relevant professionals (real estate attorney, securities-licensed representative for DSTs) is the practical pattern. The meeting establishes who is responsible for what, what the timeline looks like, and where the handoffs happen.

A reminder about scope

This is an educational guide to how the QI and tax advisor roles fit together in a 1031 exchange. It is not advice on whether to do an exchange, which QI to engage, or which tax advisor to work with.

Specific advice on any 1031 transaction requires review by qualified professionals familiar with the facts. The IRS, state revenue department, and SEC resources linked above are starting points for understanding the regulatory framework; they don't address transaction-specific questions.