In this guide
- What a QI actually does
- Why you effectively can't exchange without one
- Who's barred: the disqualified-person rule
- An unregulated industry holding your money
- The six vetting questions
- Title subsidiaries, banks, and independents
- What it costs
- When to engage one (earlier than you think)
- Frequently asked questions
What a QI actually does
The qualified intermediary exists because of one regulation: Treas. Reg. §1.1031(k)-1(g)(4), the safe harbor that lets a delayed exchange work at all. In sequence, the QI: signs an exchange agreement with you before your sale closes; is assigned into your sale contract and receives the proceeds directly at closing; holds the funds through your 45-day identification and 180-day exchange periods; receives your written identification; is assigned into your purchase contract; and wires the funds to close your replacement property. Throughout, the agreement must limit your rights to receive, pledge, or borrow the money — the “(g)(6) restrictions” — because the moment you could touch the funds, the IRS treats you as if you did.
What the QI does not do matters as much: it doesn't give tax or legal advice, doesn't find your replacement property, and doesn't guarantee your deadlines. It's plumbing — but plumbing that holds your entire equity, which is why the vetting below is about custody, not customer service.
Why you effectively can't exchange without one
Section 1031 never says “qualified intermediary.” What it and the regulations do say is that receiving the sale proceeds — actually or constructively — makes the transaction a sale, not an exchange. Money in your account, your escrow, or your attorney's trust account for even a day ends the analysis. The only structure that reliably avoids constructive receipt in a delayed exchange is the QI safe harbor; the only exchange that genuinely needs no intermediary is a true simultaneous deed-for-deed swap, which almost never happens in practice. So as a planning matter: no QI signed up before your closing, no exchange — and no fixing it afterward. It is the single most unforgiving deadline in the whole process, earlier even than day 45. (Tempted to skip it anyway? The without-a-QI guide walks every workaround people try and why each one fails.)
Who's barred: the disqualified-person rule
The natural instinct — “my lawyer will just hold the money” — is precisely what the regulations forbid. A disqualified person under §1.1031(k)-1(k) cannot serve as your QI: anyone who within the two years before the sale has been your employee, attorney, accountant, investment banker or broker, or real estate agent or broker — plus close family, and entities 10%-or-more owned by any of them. The logic is agency: the safe harbor requires an independent party, and your professionals are extensions of you. Who's left is the professional QI industry — which leads directly to the industry's structural problem. (Don't confuse disqualified persons — who can't facilitate your exchange — with the related-party rules governing who you exchange with; those carry their own two-year handcuff.)
An unregulated industry holding your money
There is no federal licensing, capital, or custody requirement for qualified intermediaries. Anyone can print business cards tomorrow. Only a handful of states regulate the business at all — a few (Nevada, California among them) impose real licensing or bonding and conduct rules; most impose nothing. The consequences arrived in 2007–2009, when a series of QI failures — firms that commingled client funds, chased yield with them, or simply stole them — cost exchangers on the order of $700 million. Clients lost their money, and many lost the tax deferral too, since the funds never made it to a replacement property.
The industry's response was voluntary: the Federation of Exchange Accommodators (FEA) promotes bonding and its Certified Exchange Specialist® designation, and the serious firms adopted segregated-account custody. But voluntary is the operative word — in our 47-firm directory, only 5 firms publicly disclose their fidelity-bond coverage and fewer than half describe their custody arrangements. The information asymmetry is the risk. Which is what the next section is for.
The six vetting questions
| Ask | The safe answer | Why it matters |
|---|---|---|
| 1. How are my funds held? | Segregated account, in your name/sub-account, dual signature required to move money | Segregation + your signature is what made the difference in every historical failure |
| 2. What's your fidelity bond? | A stated amount, in writing, sized to the funds held — not “we're bonded” | Covers theft by the firm's people; the number and carrier matter |
| 3. What's your E&O coverage? | Stated amount, in writing | Covers the botched-paperwork failure mode — a missed assignment or blown notice |
| 4. Is there a parent guaranty? | For subsidiaries of title insurers or banks: yes, written | A solvent parent standing behind the entity is real protection; an unstated one isn't |
| 5. How long have you operated? | Through at least one full cycle — ideally pre-2008 | The 2007–09 shakeout was the industry's stress test; survivors changed their custody practices |
| 6. Who exactly signs my agreement? | The QI entity itself, with the (g)(6) restrictions in the document | Confirms you're in the safe harbor and not an informal escrow arrangement |
Every answer should arrive in writing before you wire anything. A firm that won't put its bond and custody terms on paper has answered the question. Our QI Map & Directory tracks exactly these disclosures across 47 verified firms — including which firms publish them and which don't.
Title subsidiaries, banks, and independents
The industry has three broad shapes. Title-insurer subsidiaries (the largest national QIs) bring institutional balance sheets, written parent guaranties, and offices everywhere — the trade-off is call-center service on smaller files. Bank-affiliated QIs bring trust-department custody discipline and are often strongest on very large or corporate exchanges. Independents range from excellent boutiques — often founder-led, CES-credentialed, highly responsive on complex structures like reverse exchanges — to thinly capitalized operations distinguishable from the excellent ones only by the six questions above. No category is automatically safe; the custody structure, not the logo, is the protection.
What it costs
Stated fees for a standard delayed exchange run $750–$1,500 at most reputable firms, with add-ons per extra property; reverse and improvement exchanges run $3,500–$8,000+ because the intermediary's affiliate takes title to a property and holds it. The stated fee is the visible half of QI economics — the other half is interest on your funds during the hold, which is why fee-shopping without asking about interest terms optimizes the wrong number. The full breakdown — components, ranges, the interest-spread economics, and the red flags — is in the QI fee guide.
When to engage one (earlier than you think)
The right moment is when you list the property — not when you have a buyer, and never closing week. The exchange agreement and assignments take days, not hours, at careful firms; your sale contract should carry a cooperation clause; and if your deal might need a reverse structure or involves partners heading for a drop and swap, the QI conversation shapes the transaction itself. Engaging early costs nothing extra; engaging late is the most common unforced error in the whole process — and the one with no cure.