Qualified Intermediary for a 1031 Exchange: How to Choose One

A qualified intermediary (QI) is the independent party that holds your sale proceeds during a deferred 1031 exchange so you never have them in hand. No federal agency licenses QIs. The IRS rule that makes the arrangement work is a safe harbor in Treas. Reg. 1.1031(k)-1(g)(4): if the QI meets it, the QI isn’t treated as your agent, so you aren’t in constructive receipt of the cash.

That makes the choice of QI mostly a question of who’s holding your money and under what rules. The federal rules only say who can’t be a QI and what the agreement must restrict. Protection for the funds themselves comes from a few state statutes and from the terms you sign.

What the QI actually does

Under (g)(4), the QI is a person who isn’t you and isn’t a disqualified person, who signs a written exchange agreement with you, and who acquires your relinquished property and transfers it, then acquires the replacement property and transfers that to you. Between the two closings, the QI is the one holding the proceeds.

The safe harbor ends once you have an unrestricted right to the funds. That’s why the agreement terms in (g)(6), below, aren’t optional.

Who can’t be your QI

Treas. Reg. 1.1031(k)-1(k) lists disqualified persons:

• Your agent. Anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years ending on the date you transfer the first relinquished property. Two kinds of service don’t count: services on 1031 exchanges, and routine financial, title insurance, escrow or trust services from a financial institution, title company or escrow company.
• A related party. Someone related to you under IRC 267(b) or 707(b), with the ownership test dropped from 50% to 10%.
• Someone related to your agent, using the same 10% test.

There’s one carve-out for banks. For transfers on or after January 17, 2001, a bank or bank affiliate isn’t disqualified just because it’s in the same controlled group as a firm that gave you investment banking or brokerage services in the two-year window.

Limits on getting your money out

The QI safe harbor (and the qualified escrow and qualified trust safe harbors) only works if the agreement says you have no right “to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period.” Reg. 1.1031(k)-1(g)(6) allows only these exits:

Situation	When you can get the funds
You identified no replacement property by day 45	Any time after the 45-day identification period ends
You identified property and received all of it that you’re entitled to	After you receive it
You identified property and a material, substantial contingency occurs after day 45	After the contingency, if it relates to the exchange, is in writing, and is beyond your control and any disqualified person’s control

Certain items, such as prorated rents and transactional costs, are disregarded under (g)(7). An agreement that lets you pull money out on request doesn’t fit the safe harbor. Use the 1031 deadline calculator to see your own day 45 and day 180.

State laws that regulate QIs

The states below have statutes (or, in Idaho, agency guidance) that reach exchange facilitators. Most apply based on where the relinquished property sits or where the QI has an office, not where you live. Of these, only Nevada, Maine and Idaho require a license.

State	Law	License / regulator	Bond or alternative	E&O	Account rules
California	Fin. Code 51000-51013	None; enforced by civil suit	$1M fidelity bond, or $1M cash/securities/LOC, or all funds in qualified escrow or trust with dual-signature withdrawals	$250,000	Prudent investor standard; no commingling with operating accounts; no loans to affiliates
Nevada	NRS ch. 645G	License; Division of Financial Institutions	$1M fidelity bonds or $1M deposit with the Division	$250,000	Funds kept separate as trust or escrow funds; withdrawals need written approval of licensee and client
Washington	RCW 19.310	No license; AG can enforce under the Consumer Protection Act	$1M fidelity bond covering employees and owners, or all funds in qualified escrow or trust	$250,000	Separately identified account per client; client gets all earnings
Maine	10 M.R.S. 1395-1400	License; Superintendent of Consumer Credit Protection	$250,000 bond, deposit, or qualified escrow/trust	$100,000	Prudent investor standard; no commingling; no loans to affiliates
Colorado	C.R.S. 6-1-721	No license; Colorado Consumer Protection Act	$1M bond plus $250,000 E&O, or $1.25M cash/LOC, or qualified escrow/trust	Part of bond option	Withdrawals over $250,000 need dual authorization; pooling allowed with subaccounting
Oregon	ORS 673.800-673.825	No license	$1M bond, deposit/LOC, or qualified escrow/trust	$250,000	Prudent investor standard; no commingling; no loans to affiliates
Virginia	Va. Code 55.1-800 to 55.1-806	No license; civil penalty up to $2,500 per willful violation	No fidelity bond requirement	$250,000	Separately identified account with client authorization, or qualified escrow/trust
Connecticut	Public Act 13-135, ss. 5-12	No license; claims filed with the Banking Commissioner	$1M bond, or separately identified account with dual authorization, or qualified escrow/trust	$250,000	Prudent investor standard; written notice of how funds are invested
Idaho	Idaho Escrow Act, Code 30-901 et seq.	Escrow agency license	Statute: $200,000 fidelity bond plus $20,000-$250,000 surety bond; agency alternative: $1M fidelity bond, no surety bond	Statute: $50,000; alternative: $250,000	Escrow trust accounts under the Act

How the state laws differ in practice:

• California, Washington and Oregon exclude a QI that only holds funds from relinquished property outside the state. If you’re selling Texas property, California’s statute doesn’t cover your QI just because you live in Los Angeles.
• Washington requires the facilitator’s website and contract to state that exchange facilitation services “are not regulated by any agency of the state of Washington or of the United States government.” Each Washington office must be managed by an attorney, a CPA, or someone who passed an exchange-facilitation test. Knowingly violating parts of the statute is a class B felony.
• Nevada makes unlicensed activity a gross misdemeanor with a $200-per-day civil penalty, and the Division suspends a license if the bond or E&O policy is cancelled.
• Idaho has no exchange-facilitator statute. The Department of Finance’s Guidance Statement 2020-03-SB says the Escrow Act applies to 1031 QIs and that it can’t waive it. The Act doesn’t apply when the only Idaho connection is replacement property located in Idaho.
• California, Maine, Oregon, Virginia and Connecticut require notice to clients within 10 business days of a change in control of the QI, plus 90 days on its website. Colorado’s deadline is 2 business days.

What happens when a QI fails

LandAmerica 1031 Exchange Services (LES) filed for Chapter 11 on November 26, 2008. According to the Fourth Circuit’s opinion in Terry v. SunTrust Banks, No. 11-1704 (4th Cir. July 2, 2012) (unpublished), LES deposited exchange funds in its general operating account and had used other clients’ exchange funds in part to buy auction rate securities, which froze in 2008. The bankruptcy court held that the exchange funds became LES’s property, so exchangers were limited to a pro rata share of the estate rather than getting their own money back. The Fourth Circuit noted that the exchangers had chosen the QI safe harbor rather than a qualified escrow or qualified trust, and that their agreement limited LES’s duties to those “expressly set forth.”

What to check before you sign

Get the answers in writing and compare them to the exchange agreement.

• Where your funds will sit. The bank’s name, and whether the account is titled for your exchange alone or pooled with other clients’ funds.
• Qualified escrow or qualified trust versus a QI account. Under the regulations these are separate safe harbors. Ask which one the agreement uses and whether withdrawals require your written signature as well as the QI’s.
• Who can authorize a withdrawal. Single signature by the QI, or dual authorization. Colorado requires dual authorization above $250,000; California, Nevada, Washington and others build it into their alternatives.
• Bond and E&O. The amounts, the insurer, and whether the bond covers employees and owners. Nevada and Washington require the QI to give you proof; elsewhere, ask for the certificate.
• What the QI may invest in. The states listed above bar illiquid investments, commingling with operating funds and loans to affiliates. Check whether your agreement says the same.
• Fees and interest. The flat fee, any per-property or reverse-exchange fees, and who keeps the interest. Washington requires earnings to go to the client; Virginia requires interest to be allocated by written agreement.
• Referral fees. Washington requires disclosure of referral fees and any interest the QI holds in businesses it recommends. Ask anyway if you’re elsewhere.
• Change of control. Who owns the QI, and whether it will tell you if that changes mid-exchange.

Have your CPA or tax attorney read the exchange agreement before you close on the relinquished property, since it has to be in place before the sale.

The CES credential

The Certified Exchange Specialist (CES) designation comes from the Federation of Exchange Accommodators, a trade association. It’s a private credential, not a license. Candidates need at least 3 of the past 7 years of full-time-equivalent work at a QI company, must pass an exam on 1031 rules and the ethics of holding another person’s funds, must disclose any fraud or embezzlement convictions and any revoked license, and must keep up continuing education. Attorneys and CPAs get no exemption. No state statute reviewed here requires it.

Interview at least two QIs and ask each the questions above. This site has no referral arrangements with any QI; see the disclosures page.

Sources

• Treas. Reg. 1.1031(k)-1 (eCFR)
• California Financial Code Division 20.5
• Nevada NRS chapter 645G
• Washington RCW 19.310
• Maine 10 M.R.S. 1395
• Colorado Revised Statutes (6-1-721)
• Oregon ORS chapter 673
• Virginia Code 55.1, chapter 8
• Connecticut Public Act 13-135
• Idaho Code 30-903 and 30-909
• Idaho Department of Finance Guidance Statement 2020-03-SB
• Terry v. SunTrust Banks, Inc., No. 11-1704 (4th Cir. 2012)
• FEA: About the CES and Become a CES