How To Find a Qualified Intermediary

Last updated on June 25th, 2021 at 09:28 am

Find your best qualified intermediary | Appropriate experience for a qualified intermediary | Qualified intermediary location | Costs and fees | Handling funds | Customer service | 1031 exchange oversight | Is the qualified intermediary insured and bonded? | FAQs

Finding a qualified intermediary (QI) to handle your 1031 exchange isn’t difficult — if you know where to look.

But finding a qualified intermediary is just the first step in a long process. Vetting candidates and finding the qualified intermediary who’s best experienced for your specific circumstances is more involved, yet it’s vital if you want to have a smooth 1031 exchange that meets IRS standards.

So how do you find a qualified intermediary for your 1031 exchange, and how do you evaluate potential QIs? Read on and we’ll address both those points — and much more.

Find and contact a professional qualified intermediary service

Many companies and services offer qualified intermediaries to help you execute a 1031 exchange. A Google search will bring up a long list of them.

Of course, you’re left with the question of their qualifications and experience. One solution: Seek out customer reviews or lists of recommended providers, like our vetted list of the Best 1031 Exchange Companies

You could also go to the source of credentials for 1031 qualified intermediaries.

Contact the Federation of Exchange Accommodators

According to its website, the Federation of Exchange Accommodators (FEA) is “the only national trade association organized to represent professionals who conduct like-kind exchanges under Internal Revenue Code 1031.” 

The FEA oversees the main certification program for qualified intermediaries (QIs), called the Certified Exchange Specialist (CES) program.

In order to take the CES exam, potential QIs need three years of full-time employment as a qualified intermediary, a clean criminal record, and an exchange company set up that meets Treasury regulations.

Passing this exam isn’t an ironclad guarantee that a potential QI will do a great job. The exam, however, does weed out beginners, shady operators, and amateurs. FEA members also get access to the latest legal and tax developments related to 1031 exchanges.

Detailed profiles of QIs in your area can be found through the FEA member directory.

Get referrals from personal and business associates

Word of mouth can be a great way to find a qualified intermediary (QI) Consider asking for a referral from:

  • A CPA with 1031 exchange experience
  • A real estate attorney
  • A reputable title company
  • The other party in the 1031 exchange

Any of these professionals should be able to recommend a reputable QI. 

If you’re looking for an experienced qualified intermediary, we can recommend 1031x, which has nearly 30 years of experience handling 1031 exchanges, and has overseen over $2.5 billion in assets safely exchanged. Contact them today for a free consultation.

How to find your best qualified intermediary for a 1031 Exchange

Before we get into how to find the best qualified intermediary (QI) for your needs, we should quickly touch on why, exactly, you need to use a QI.

A 1031 exchange provides an investor tax deferral advantages because, from the IRS’ point of view, the investor doesn’t actually sell their property, or receive any money from its sale. A third party, in the form of the qualified intermediary, sells the relinquished property, handles the money, purchases the replacement property, and then transfers the title of the new property to the investor. 

In a way, the qualified intermediary is the engine of the 1031 exchange.

Qualified intermediary 101
A qualified intermediary (QI) is a third party that facilitates a 1031 exchange for a taxpayer. At the core, QIs: 
  • They receive the relinquished property from the taxpayer and sell it to the buyer
  • They hold onto the sale proceeds during the exchange period on behalf of the taxpayer
  • They buy the replacement property from a seller and transfer it to the taxpayer
» LEARN MORE: 1031 exchange terms and definitions

✍️ Editor’s note: If you’re executing a reverse 1031 exchange, in which the replacement property is purchased before the relinquished property is sold, your exchange will be executed by a QEA — a qualified exchange agent, or qualified exchange accommodator.

What are the qualified intermediary requirements?

The short and somewhat disturbing answer is: technically, there are none.

Qualified intermediaries (QIs) aren’t federally regulated, and there are no licensing or educational requirements. The only IRS requirements for a QI are:

  • You can’t be your own intermediary
  • You can’t use a relative as an intermediary
  • You can’t use anyone who’s acted as your agent in the previous two years as an intermediary

Aside from that, nearly anyone can legally offer their services as a QI, which puts tremendous pressure on individual investors to perform their due diligence on any QIs they’re considering.

Ask potential qualified intermediaries these basic questions: 

Does the qualified intermediary have appropriate experience?

The Federation of Exchange Accommodators requires potential qualified intermediaries (QIs) to work full-time for at least three years before they can even sit for the CES exam. Three years is a great baseline to start from; five to ten years is a solid amount of experience.

Also, note the difference between how long a company’s been in business and how long an individual employee has been conducting 1031 exchanges. The company may have been founded in 1980, but the QI you’re talking to may have only started handling exchanges last year. 

Always ask potential QIs how long they’ve been in the business.

What’s the size of the company?

A 1031 exchange is subject to strict timelines. If you go even one day over the limit, you lose tax deferral benefits.

So if you’re working with a qualified intermediary who’s operating solo, and they come down with an illness or some other emergency, your entire 1031 exchange could fail. A company can often offer backup support in case your QI goes out of commission.

What’s the background of the company and/or the qualified intermediary? 

The best background for a qualified intermediary is hands-on, specific experience conducting 1031 exchanges.

Beyond that, real estate attorneys, real estate professionals, tax professionals, and CPAs all bring useful expertise to the table.

How many 1031 exchange deals has the qualified intermediary done in recent years?

You don’t want to be your qualified intermediary’s first 1031 exchange. You want a QI who’s handled at least a moderate number of exchanges — 5-10 at a minimum.

How many different kinds of exchanges has the qualified intermediary done?

There are many types of 1031 exchanges, from construction 1031 exchanges, to reverse 1031 exchanges, to deferred 1031 exchanges. A different set of rules and regulations governs each, so it’s important to find a qualified intermediary who has experience with the type of 1031 exchange you’re interested in. 

Is the qualified intermediary near me? 

While some highly experienced qualified intermediaries (QIs) work nationally, and are capable of serving any market, it’s good to work with a QI near you.

That’s because, no matter what type of exchange you end up using, there are advantages to knowing the local market. 

1031 exchange typeAdvantage of a local qualified intermediary (QI)
Deferred 1031 exchangeThe most common type of 1031 exchange. You must close on the purchase of your new property within 180 days after your sale. If you end up pressed for time, a local QI likely knows who can help you close quickly to meet the deadline, and who to avoid.
Reverse 1031 exchangeIn this significantly more complicated type of exchange, you need to close on your purchase first. A local QI should have a sense of the local market and can advise you on pricing strategy.
Improvement 1031 exchangeAnother complicated exchange where you try to improve the property you wish to purchase. Only construction completed by day 180 is eligible for tax deferral. A local QI should know the fastest and most dependable contractors.
Simultaneous 1031 exchangeIn this exchange you swap properties with your buyer. It's the only kind of 1031 exchange that doesn't require a QI, though it's best to use one. A local QI should know the best title and escrow services who can help you coordinate this difficult maneuver.

What are the costs and fees of using a qualified intermediary?

You’re likely doing a 1031 exchange to save money on taxes, so it stands to reason that you’ll want to keep your costs low. 

On the other hand, a certain amount of experience and expertise is worth extra money.

According to our research, the average cost of a 1031 exchange is around $1,000, not including fees. You won’t want to pay much more than that, unless you’re getting premium services.

>> LEARN MORE: How much does a 1031 exchange cost?

How will a 1031 qualified intermediary handle the funds?

Between the time your qualified intermediary (QI) sells your relinquished property and buys your replacement property, they’ll hold onto that money for you.

This is likely a significant amount of money — well into six figures, or more. The reason fees for 1031 exchanges are relatively low is that most QIs put that money to work, earning interest income off your sale proceeds during the 1031 exchange process.

Clearly there’s some risk here, and horror stories exist about what can happen to your money if your QI goes bankrupt while holding onto your money.

Ask any potential QI where your money will be during the 180-day exchange period, and how they’re going to use it.

Will your money be at a FDIC-insured institution?

If so, your money will be insured by the federal government. If not, your money is exposed to some risk.

Will your funds be commingled with others’ funds?

Your money could be put into a common bank account along with the funds of other investors executing 1031 exchanges. Some qualified intermediaries (QIs) do this because it makes it easier to earn lucrative interest income.

It also exposes your money to more risk. A large exchange company went bankrupt in 2008 after losing the exchange funds of several hundred clients in bad investments. In the aftermath, a bankruptcy court ruled that commingled funds in the QI’s bank account (and sub-accounts) were fair game for that QI’s creditors, while funds in separate accounts would have been protected. 

Make sure your funds will be kept in a separate escrow account.

Will your funds be separate from the qualified intermediary’s operating funds?

Your money should be segregated from other investors’ money and from the qualified intermediary’s operating funds. 

How many signatures are required to release the exchange funds?

Typically, the release of your money will require your signature as well as your qualified intermediary’s signature. It’s best to have joint control of your funds.

Does the qualified intermediary have good customer service?

You want a qualified intermediary (QI) who’s responsive and communicative. If your QI responds to your initial communication within eight hours, that’s a good sign. If they don’t, you should be hesitant.

Also consider how much communication you want and need from your QI. Many QIs are all digital, so you may not be able to call them up. If that’s a high priority for you, ask these questions at the outset.

In that same vein, if you want face time, ask if they provide in-person service. You may also want a consultation before you enter into a contract.

Finally, always investigate the company’s online reviews. If they have a lot of positive reviews, that’s a very good sign. If they have negative reviews, or no reviews, you want to be careful.

Does your qualified intermediary for a 1031 exchange have oversight?

While 1031 exchanges aren’t federally regulated, some states have passed laws that provide oversight on qualified intermediaries (QIs) and 1031 exchanges. Those states are:

  • California
  • Colorado
  • Connecticut
  • Idaho
  • Maine
  • Nevada
  • Oregon
  • Virginia
  • Washington

If you’re conducting a 1031 exchange in one of these states, make sure your qualified intermediary is familiar with the state laws governing your exchange.

Furthermore, many companies that specialize in 1031 exchanges have internal controls to monitor cash and property flow. 

Ask your QI if their company provides this type of oversight. If so, ask what kind of controls are in place to protect your money and interests.

Is the qualified intermediary insured and bonded? 

Your qualified intermediary (QI) should carry insurance and bonds to protect your money and your interests. This includes:

  • Errors and omissions insurance

This coverage provides financial protection in case of claims against your QI for significant negligence or errors. 

  • Fidelity bonds

Also known as “crime insurance,” these bonds cover claims against the QI based on dishonest, criminal, or fraudulent activity.

FAQs about finding a qualified intermediary

Can a title company be a qualified intermediary?

Yes, as long as it and its employees meet the other basic IRS requirements for a qualified intermediary:

  • They’re not related to you. 
  • They haven’t acted as your agent in the previous two years.

Can I do a 1031 exchange without a qualified intermediary? 

You cannot act as your own qualified intermediary in a 1031 exchange.

You must pay a third party to execute the exchange for you, even if they’re not a professional qualified intermediary. 

According to IRS rules, anyone can act as your qualified intermediary as long as they’re not related to you, and haven’t acted as your agent in the previous two years.

2 thoughts on “How To Find a Qualified Intermediary”

  1. It is critical that investors work with a Qualified Intermediary that has some type of government oversight. Less than 1% of Qualified Intermediaries are licensed, regulated or audited by any regulatory body. The annual regulatory audits ensure that the 1031 Exchange Qualified Intermediary is operating in a safe and sound manner. Government oversight can include regulatory agencies such as a State Division of Banking, State Banking Department, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve, etc.

    Reply
    • Thanks for your comment, Bill. 100% agree.

      Washington state has made some interesting inroads here. What do you think about their efforts?

      Reply

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