The Role of the Qualified Intermediary in a 1031 Exchange

A qualified intermediary is required for nearly every 1031 exchange because of the constructive receipt doctrine. If an investor takes direct possession of sale proceeds, even briefly, the funds are treated as received, and the exchange fails. The qualified intermediary provides a safe harbor structure that keeps the investor from ever holding or controlling the exchange proceeds.

Why Direct Receipt of Funds Disqualifies an Exchange

Under general tax principles, an investor is treated as having received income once it is credited to their account or made available without restriction, even if they choose not to take it. A qualified intermediary removes this exposure by entering into a written exchange agreement that limits the rights of the investor to the exchange funds until the replacement property closing.

What a Qualified Intermediary Does

• Enters into a written exchange agreement with the investor before the relinquished property closes
• Receives and holds the relinquished property sale proceeds in a qualified escrow or trust account
• Prepares assignment documents transferring the contract rights of the investor for both the relinquished and replacement property
• Disburses funds directly to the closing agent for the replacement property purchase
• Provides documentation the tax preparer of the investor needs to complete IRS Form 8824

What a Qualified Intermediary Does Not Do

A qualified intermediary does not provide tax advice, does not make identification decisions on behalf of the investor, and is not a real estate broker. If Delaware Statutory Trust or tenant in common interests are being considered as replacement property, the qualified intermediary does not sell those interests. DST or TIC interests may be securities. We do not sell securities. We provide introductions to licensed providers only.

Disqualified Persons

The investor cannot use an agent, attorney, accountant, employee, or broker who acted for the investor in a non-exchange capacity within the two years before the exchange as the qualified intermediary. Related parties, including certain family members and entities the investor controls, are also generally excluded from serving in this role.

Selecting a Qualified Intermediary for a DC Metro Transaction

Washington DC does not license qualified intermediaries, unlike a small number of states that regulate the industry directly. Investors should confirm fidelity bond coverage, errors and omissions insurance, and whether exchange funds are held in segregated qualified escrow or trust accounts rather than a commingled operating account before selecting an intermediary for a District, Maryland, or Virginia transaction.

Exchange Agreement Provisions to Review

• How and where exchange funds are held, including the name of the depository institution
• Whether interest earned on exchange funds is credited to the investor or retained by the intermediary
• The process and timing for releasing funds at the replacement property closing
• Fee structure, including identification fees, per-property fees, and wire fees
• Procedures for a failed exchange, including how remaining funds are returned

Coordinating the Qualified Intermediary With Escrow and Title

The qualified intermediary does not replace the title company or escrow officer handling the closing. Instead, the qualified intermediary is added to the transaction through an assignment of the purchase and sale agreement, and the closing statement is prepared to show the qualified intermediary as the source of funds. For District of Columbia closings, the title company and the qualified intermediary should confirm recording requirements and transfer tax filing responsibilities early, since these filings run on a separate track from the exchange documentation.

Building a Relationship Before the Exchange Begins

Because the qualified intermediary agreement must be signed before the relinquished property closes, waiting until the day of closing to select an intermediary leaves little time for review. Investors planning a sale in the Washington DC metro area benefit from engaging a qualified intermediary as soon as a listing is signed, so the exchange agreement, fee schedule, and account setup are complete well before the forty-five day clock begins.

Frequently Asked Questions

Can an investor act as their own qualified intermediary?

No. The investor, and anyone who acted as an agent for the investor within the two years before the exchange, is a disqualified person and cannot serve as the qualified intermediary.

Does the qualified intermediary sell replacement property?

No. The qualified intermediary holds funds and prepares exchange documentation. It does not act as a real estate broker, and it does not sell securities such as Delaware Statutory Trust interests.

What happens if a qualified intermediary becomes insolvent during an exchange?

This risk is one reason to select a qualified intermediary with fidelity bond coverage, errors and omissions insurance, and segregated qualified escrow or trust accounts. Funds held in a commingled account face greater exposure if the intermediary becomes insolvent.

This article provides educational content only. It does not constitute tax, legal, or investment advice. Section 1031 defers federal income tax on qualifying real property and does not remove Washington DC transfer or recordation tax obligations. Consult a qualified tax advisor or attorney before acting on any exchange timeline.

DST or TIC interests may be securities. We do not sell securities. We provide introductions to licensed providers only.