Guides

The Qualified Intermediary Role

A Qualified Intermediary, generally referred to as a QI, is the independent party required under the safe harbor rules in Treasury Regulation 1.1031(k)-1(g)(4) to hold exchange proceeds and prevent the taxpayer from having actual or constructive receipt of the sale funds. Constructive receipt generally means the taxpayer had the ability to control or access the funds even if they did not physically take possession, and if constructive receipt occurs at any point, the exchange generally fails and the transaction is treated as a taxable sale rather than a deferred exchange. Because of this rule, San Diego, CA investors cannot generally hold their own sale proceeds, even briefly, and cannot generally have their attorney, accountant, real estate agent, or other party who has acted as their agent within the two years before the exchange serve as the QI, since that relationship is generally treated as disqualifying under the safe harbor. The QI's role generally begins before the relinquished property closes, with the preparation of an exchange agreement and an assignment of the taxpayer's rights in the sale contract to the QI. At closing, sale proceeds are generally wired directly to a qualified escrow or trust account controlled by the QI rather than to the taxpayer, and the QI generally holds those funds until they are needed to acquire replacement property. During the exchange period, the QI generally receives the taxpayer's written identification of replacement property, coordinates with escrow and title on each replacement closing, and generally releases funds directly to the replacement property escrow rather than to the taxpayer. San Diego, CA investors working with Qualified Intermediaries on properties located outside the state should confirm the QI has experience coordinating multistate closings, since timing, wire procedures, and state specific withholding requirements can vary. It is worth noting that a Qualified Intermediary is not the same as an Exchange Accommodation Titleholder, which is used in reverse and improvement exchanges, and a QI is also not permitted to give tax or legal advice, since that role belongs to the investor's own attorney or CPA. Choosing a QI with fidelity bond coverage, errors and omissions insurance, and segregated qualified escrow accounts is generally considered a prudent practice, since QI funds have occasionally been misappropriated in isolated industry incidents, and San Diego, CA investors should generally ask about these safeguards before funding an exchange. We coordinate introductions to Qualified Intermediaries and help gather the documentation they generally require to open an exchange file promptly once escrow is set to close. San Diego, CA investors should also generally ask a prospective QI how long they have operated, how many exchanges they generally close in a typical year, and whether they maintain a dedicated compliance or exchange operations team, since QI capacity can vary widely between a small regional shop and a larger national firm. For exchanges involving unusual structures, such as a reverse exchange, an improvement exchange, or a transaction with a related party, we generally recommend confirming the QI has direct, recent experience with that specific structure rather than assuming general exchange experience automatically transfers, since the documentation and safe harbor requirements can differ meaningfully between structures. San Diego, CA investors should generally also understand that the QI relationship is generally governed by a written exchange agreement that spells out fees, the scope of the QI's duties, and how interest earned on held funds is generally treated, and reviewing that agreement carefully before signing is generally worth the time it takes. Educational content only. This is not tax, legal, or investment advice, and investors should independently vet any Qualified Intermediary before entering into an exchange agreement.