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A 1031 exchange is one of the best ways for real estate investors to defer capital gains taxes. But there’s one key player you can’t skip: the Qualified Intermediary (QI). If you try to handle the exchange yourself, you’ll lose the tax benefits. The IRS is clear – funds must go through a QI.
So, what does a QI do, and why can’t you bypass them? Let’s break it down.
What Is a Qualified Intermediary?
A Qualified Intermediary is a neutral third party who facilitates a 1031 exchange. They hold the proceeds from the sale of your property and ensure the transaction follows IRS rules. Without one, your exchange won’t qualify for tax deferral.
The IRS has strict rules on who can serve as a QI. Your accountant, attorney, real estate agent, or anyone who has worked for you in the last two years cannot act as your QI. It must be an independent party who specializes in 1031 exchanges.
What is the Role of a Qualified Intermediary?
A QI plays a crucial role in a 1031 exchange. Their job is to make sure everything is done correctly so you don’t end up paying taxes on your sale.
1. Holding and Managing Exchange Funds
The most important role of a QI is to hold your sale proceeds. If you touch the money from your sale, even for a moment, the IRS considers it a taxable event. That means you could owe capital gains taxes immediately.
Your QI should place the funds in a segregated, insured account and release them only when it’s time to buy your replacement property.
2. Drafting Essential Exchange Documents
A QI prepares all necessary exchange agreements. These documents establish the legal framework for your 1031 exchange. They include:
- Exchange Agreement – Outlines the structure of your exchange.
- Assignment Agreement – Assigns your rights in the sale contract to the QI.
- Notice of Assignment – Notifies the buyer and seller that the exchange is happening.
Without these documents, your exchange won’t meet IRS requirements.
3. Ensuring IRS Compliance
A 1031 exchange has strict timelines:
- 45 days to identify potential replacement properties.
- 180 days to close on your replacement property.
A QI makes sure you meet these deadlines. They also help you navigate the three-property rule, 200% rule, or 95% rule for property identification. Missing deadlines or making an incorrect identification could disqualify your exchange.
4. Facilitating a Smooth Transaction
A QI coordinates with the title company, escrow agent, and real estate professionals to ensure a smooth process. They handle all fund transfers and paperwork, so you don’t have to worry about compliance issues.
These roles of a qualified intermediary are essential to a IRS-compliant 1031 exchange.
Why You Can’t Bypass a Qualified Intermediary
Some investors wonder if they can skip the QI and handle the process themselves. The short answer? No!
Here’s why:
1. The IRS Requires a QI
The IRS has strict anti-constructive receipt rules. This means you cannot take possession of the sale proceeds. Even if you intend to reinvest, touching the funds makes them immediately taxable.
A QI is the only way to structure a valid 1031 exchange.
2. Handling Funds Yourself Cancels the Exchange
If the sale proceeds hit your bank account – even briefly – your exchange is invalid. You’ll owe capital gains taxes on the entire sale amount.
A QI prevents this by holding the funds in escrow until you close on your replacement property.
3. Avoiding Costly Mistakes
A 1031 exchange has complex rules. If you make a mistake (like missing a deadline or misidentifying a property) you could lose your tax deferral. A QI keeps you on track and ensures everything is done correctly.
4. Reducing Audit Risk
The IRS closely watches 1031 exchanges. Any errors could trigger an audit, costing you time and money. A QI makes sure all documents are correct and compliant, reducing the risk of IRS scrutiny.
How to Choose the Right Qualified Intermediary
Not all QIs are the same. Choosing the wrong one can put your exchange at risk. Here’s what to look for:
1. Experience
Look for a QI with years of experience handling 1031 exchanges. An experienced QI will know how to handle complex transactions, including reverse and improvement exchanges.
2. Financial Security
Your QI will be holding your money. Make sure they have segregated accounts and carry fidelity bonds and errors & omissions (E&O) insurance. This protects your funds from fraud or mismanagement.
3. Compliance Knowledge
1031 exchange laws change over time. Choose a QI who stays up to date on IRS rulings and compliance requirements.
4. Transparency
A reputable QI will provide a clear fee structure and explain how they handle funds. Avoid QIs who are vague about costs or mix client funds together.
Red Flags to Watch Out For
Some QIs cut corners or operate in a way that puts your exchange at risk. Here are some warning signs:
- No separate accounts – If a QI pools funds from multiple clients, your money is at risk.
- Unclear fees – A professional QI should be upfront about costs.
- No insurance or bonding – This could leave you exposed to financial losses.
Conclusion
A Qualified Intermediary is a required part of a 1031 exchange. You cannot bypass them without disqualifying your transaction and triggering capital gains taxes. The role of a Qualified Intermediary is to hold funds, prepare documents, and ensure compliance with IRS rules.
Choosing the right QI is critical. Work with an experienced, transparent professional to ensure a smooth and IRS-compliant exchange.
If you’re planning a 1031 exchange, don’t take risks! Partner with a trusted Qualified Intermediary to protect your tax savings. Give us a call at 888-508-1901 to get started.

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