What is a Qualified Intermediary (QI) in a Section 1031 Exchange?

Eric Odum MIBS
July 15, 2008 — 2,144 views  
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As replacement property specialists, the most common question we are asked is, "What is a Qualified Intermediary and why do I need one?"

A Qualified Intermediary (QI) is required to successfully complete a Section 1031 Exchange.  According to IRS code, a qualified intermediary is a person or entity that facilitates a Code Section 1031 exchange and is defined as follows:

1. Is not the taxpayer or a disqualified person;

2. Enters into a written agreement with the taxpayer (the Exchange Agreement) under which the QI:

Acquires the relinquished property from the taxpayer;
Transfers the relinquished property;
Acquires the replacement property;
Transfers the replacement property to the taxpayer.

3. The Exchange Agreement must expressly limit the taxpayer's rights to receive, pledge, borrow, or otherwise obtain benefits of money or other property held by the QI.  (See Treasury Regulations §1031.1031(k)-1(g)(4)(i).)

Disqualified Person

One of the most significant issues we run in to when exchanging for clients is violation of the disqualified person rule listed above.  Simply put a disqualified person is:

one who, within the two-year period ending with the disposition of the Relinquished Property, has acted as the Exchanger's Advisor, including:

employees
family members
attorney
accountant
investment banker or broker or,
real estate agent or broker

Ouch!  These are the people most investors trust the most and usually want to handle the exchange.  But, the IRS would not look kindly on such a transaction.  The QI must be a non-involved, unrelated, arms-length, third party entity.

As an exchanger, who can you use to successfully complete your exchange?  One suggestion would be to go to the Federation of Exchange Accommodators (www.1031.org) and find one with which you are comfortable, preferably one that is licensed, bonded and insured.

Finding the right one is not a daunting task, as many of the large banks and financial companies are involved in some form or fashion. Three of the larger, more established firms are IPX 1031, Asset Preservation and Starker Exchange.   Besides the aforementioned IRS code regarding QI's, use of an experienced QI can significantly reduce the complexity of an exchange by ensuring the execution of proper documentation. 

A good QI will coordinate with each exchanger's advisors to ensure compliance of 1031 rules and regulations, prepare necessary documents, facilitate the sale of their relinquished property and the purchase of the replacement property, hold and protect the sale proceeds on behalf of the exchanger, provide guidance information and time schedules throughout the exchange.

Eric Odum MIBS

Triple Net Lease Real Estate

Eric Odum is a veteran in the real estate and financial services industry with over 13 years of experience. Mr. Odum holds a Masters in International Business in Finance from the University of South Carolina (consistently ranked as one of the top International Business Schools by US News and World report).