What Is a Qualified Intermediary (QI) in Real Estate?

A Qualified Intermediary (QI), also known as an accommodator, is an independent entity that facilitates a 1031 tax-deferred exchange for real estate investors. This process, named after Section 1031 of the Internal Revenue Code, allows an investor to sell an investment property and defer paying capital gains taxes if the proceeds are used to purchase a “like-kind” property. The QI is a required participant, acting as a neutral third party to ensure the transaction adheres to government rules.

The Role of a Qualified Intermediary

The necessity of a QI stems from the principle of “actual or constructive receipt.” For a 1031 exchange to be valid, the investor cannot control or access the proceeds from their property’s sale. If the seller receives the funds, the Internal Revenue Service (IRS) considers it a taxable sale. To avoid this, Treasury Regulation §1.1031 permits using a QI to hold the proceeds from the relinquished property in a secure account, ensuring the investor never touches the funds directly.

Beyond holding funds, the QI prepares the legal documents that structure the exchange. They formally acquire the relinquished property from the seller to transfer it to the buyer, and then acquire the new replacement property to transfer it to the investor. This is a legal assignment of rights, and the QI does not need to be in the chain of title. This process creates the reciprocal trade required by the IRS. The QI must be an independent party; an individual’s attorney, accountant, or real estate agent is disqualified from serving in this role.

Required Documentation and Information

Before an exchange, the property owner, or “exchanger,” must provide the QI with specific information. The QI will require the exchanger’s full legal name, address, and taxpayer identification number. It is also necessary to provide a detailed legal description of the property being sold to ensure accuracy in legal documents.

The primary document prepared by the QI is the Exchange Agreement. This contract establishes the relationship between the exchanger and the QI, outlining the terms and obligations of the exchange. To complete this agreement, the exchanger must provide the contact information for the closing agents handling both the sale and the purchase.

The Purchase and Sale Agreement for the property being sold must also contain specific language. It should include a clause stating the seller’s intent to perform a 1031 exchange. This clause also acknowledges that their rights under the contract will be assigned to a Qualified Intermediary.

The 1031 Exchange Timeline with a QI

The first step is to engage a QI and execute the formal Exchange Agreement before the closing of the relinquished property sale. Failing to do so makes the transaction a taxable event. Once the agreement is in place, the QI coordinates with the closing agent to have the sale proceeds wired directly into the secure exchange account they manage.

From the date the relinquished property sale closes, two strict deadlines begin. The first is the 45-Day Identification Period, during which the exchanger must provide a written, signed notice to the QI that identifies potential replacement properties. The most common option is the “three-property rule,” allowing the identification of up to three properties of any value. Alternatively, an exchanger can use the “200% rule” to identify any number of properties, as long as their total fair market value does not exceed 200% of the value of the property sold.

The second deadline is the Exchange Period, which runs concurrently. The exchanger must complete the purchase of an identified replacement property within 180 days from the initial sale closing, or the due date of their tax return for that year, whichever is earlier. To complete the purchase, the exchanger requests the QI to wire the exchange funds to the closing agent for the new transaction. The exchange is complete once the replacement property is acquired.

Selecting a Qualified Intermediary

Choosing a reputable QI is an important decision, as they safeguard substantial funds. A primary consideration is the security of these proceeds. Inquire whether the QI holds funds in segregated qualified trust or escrow accounts with established, FDIC-insured financial institutions. This prevents the commingling of your money with other clients or the QI’s operating funds.

An intermediary’s experience and transaction volume are also indicators of their competency. A firm that has facilitated a high number of exchanges is more likely to have the expertise to handle complex situations. Verify that the QI carries adequate bonding and Errors & Omissions (E&O) insurance, which protects you from potential negligence.

Finally, ensure you understand the QI’s fee structure, which should be clear and transparent. Ask for a detailed breakdown of all costs associated with the exchange. It is also wise to inquire about their customer service, as you will be working closely with them under tight deadlines. Some professionals may hold a Certified Exchange Specialist® (CES®) designation, which indicates a high level of expertise and commitment to continuing education.