Short answer
A qualified intermediary (QI) is a third party who holds the proceeds from the sale of your property and uses them to buy the replacement property, so you never receive the cash. Your own agents and related parties cannot serve as your QI, and you should hire one before the sale closes.
1. What a qualified intermediary does
In a delayed 1031 exchange, you sell the relinquished property and buy the replacement later. If you received the sale proceeds, the exchange could fail and the gain would be taxable. The QI avoids that by:
- 1Taking an assignment of your contract to sell and buy.
- 2Holding the sale proceeds in an account you cannot reach.
- 3Paying the money toward the replacement property when you close on it.
- 4Giving you the paperwork to document the exchange.
2. Who cannot be your QI
Related parties and your agents, such as your attorney, accountant or real estate broker, are disqualified persons under the IRS rules and cannot act as your qualified intermediary.
3. Timing and what a QI does not do
- The 45-day identification and 180-day exchange periods run from the day you transfer the old property. See the 45 and 180-day rules.
- A QI does not give tax advice. Talk to a tax adviser about your own numbers.
- If the QI causes a timing requirement to fail, the transaction may not qualify as a deferred exchange, and the gain may be taxable in the year of the sale.
- If a QI defaults because of bankruptcy or receivership, you may be able to report the gain as payments are received under Rev. Proc. 2010-14.
4. Questions to ask before you hire
- How are exchange funds held, and who has access to the account?
- Is the money held in a segregated account in your name or pooled with other clients?
- What insurance or bonding covers the funds?
- What is the total fee and what does it include?
- Who will handle your file, and how do they confirm your 45-day and 180-day dates?
- Do they support reverse or improvement exchanges, if you may need one?
5. Check your numbers first
The calculator shows how much of your gain is deferred and whether your replacement property avoids boot. Run it before you talk to a QI so you know the price and debt you need to replace.
6. Frequently asked questions
Do I need a qualified intermediary for a 1031 exchange?expand_more
For a delayed exchange, yes in practice. The proceeds must be held by a QI so you do not take possession of them.
Who cannot be a qualified intermediary?expand_more
Related parties and your agents, such as your attorney, accountant or broker, cannot serve as a qualified intermediary.
When should I hire a qualified intermediary?expand_more
Before the sale of the relinquished property closes, because the exchange documents and the account must be in place at closing.
What happens if the qualified intermediary goes bankrupt?expand_more
If a QI defaults due to bankruptcy or receivership, you may be able to report the gain as payments are received under Rev. Proc. 2010-14. Ask a tax adviser how it would apply to you.
7. Sources
- menu_bookIRS: Instructions for Form 8824