How to Choose a Qualified Intermediary: The Complete Checklist

Your qualified intermediary will hold hundreds of thousands of dollars of your money for up to six months. If they commingle funds, lack proper insurance, or simply disappear, your exchange — and your capital — is at risk. Here's how to choose one you can trust.

What a QI actually does (and doesn't do)

A qualified intermediary performs three essential functions in a deferred 1031 exchange:

1. Holds your sale proceeds. When your relinquished property closes, the proceeds go to your QI, not to you. They hold the funds in escrow until you're ready to close on your replacement property. This custody function is what prevents "constructive receipt" — the IRS rule that would kill your exchange if you touched the money.

2. Manages the paperwork. Your QI prepares the exchange agreement, coordinates with title and escrow to ensure proceeds are properly routed, receives and timestamps your written identification of replacement properties, and releases funds when you close on the replacement.

3. Maintains the timeline. A good QI sends deadline reminders, confirms receipt of your identification, and ensures the mechanical steps of the exchange happen on schedule.

What a QI does NOT do: A QI does not provide tax advice, legal advice, investment advice, or property-finding services. They are not your advisor — they are your facilitator and custodian. If your QI is recommending specific investments or giving tax opinions, that's a red flag, not a feature.

The five things that matter most

1. Fund security: segregated, qualified escrow accounts

This is the single most important factor. Your exchange proceeds — potentially hundreds of thousands or millions of dollars — must be held in accounts that are:

Segregated: Your funds are in a separate account, not mixed with the QI's operating funds or other clients' money. Commingling is the biggest risk in the QI industry. If a QI commingles funds and faces financial trouble, your money is at risk in bankruptcy proceedings.

FDIC-insured: The escrow account should be at an FDIC-insured bank. Ask for the bank name and confirm the insurance applies.

In a qualified escrow or trust: Under the regulations, the exchange proceeds must be held in a "qualified escrow account" or "qualified trust" to ensure you don't have actual or constructive receipt.

Ask every QI candidate: "Where exactly will my money be held? Is the account segregated in my name or commingled with other clients? What bank is it at? Is it FDIC-insured?" If they can't answer clearly, walk away.

2. Fidelity bond and errors-and-omissions insurance

A fidelity bond protects against employee theft or fraud within the QI firm. If an employee diverts your funds, the bond covers it.

An errors-and-omissions (E&O) policy covers processing mistakes — a deadline miscalculation, a misrouted wire, a paperwork error that damages your exchange.

Ask for the coverage amounts. A QI handling millions in exchange funds should carry millions in coverage. A $100,000 fidelity bond on a firm holding $50 million in client funds is not meaningful protection.

3. Experience and institutional stability

How long has the firm been operating? How many exchanges have they completed? What is their annual transaction volume?

A QI that has processed thousands of exchanges over 10+ years has battle-tested systems, compliance protocols, and institutional knowledge. A solo practitioner who started offering QI services last year may be competent but lacks the track record.

Ask whether the firm has survived a real-estate downturn (2008, 2020). Firms that maintained operations through market stress have proven their stability.

4. Fee structure and transparency

QI fees for a standard deferred exchange typically range from $750 to $1,500. More complex exchanges (reverse exchanges, improvement exchanges, multiple replacement properties) can cost $2,000-$5,000 or more.

The interest question: Your QI earns interest on the funds they hold. Ask: is interest earned on my escrow credited back to me, or does the QI keep it? Some QIs return all interest to the client. Some keep it as part of their compensation model (which is why their upfront fees are lower). Some share it. There's no universally "right" answer, but you should know the terms before you sign.

Compare fees honestly. A QI charging $500 who keeps all interest on your $500,000 held for 4 months at 4% is earning roughly $6,700 from your funds. A QI charging $1,200 who returns all interest costs you $1,200 net. The "cheaper" QI is actually more expensive.

5. Responsiveness and service quality

During the 45-day identification window, you may need to contact your QI urgently — to confirm an identification was received, to ask about a deadline nuance, or to coordinate a fast-moving closing. A QI that takes 48 hours to return calls is a liability during a time-sensitive exchange.

Ask for a dedicated point of contact. Ask about their communication process for deadline reminders. Ask what happens if you need to reach someone on a weekend or holiday (remember, Day 45 might fall on a Saturday).

Red flags that should make you walk away

They commingle funds. If your money goes into a general operating account or a pooled client account without clear segregation, stop. This is the single biggest risk factor.

They lack insurance. No fidelity bond or E&O coverage means there's no safety net if something goes wrong.

They're a disqualified person. If the QI has served as your attorney, accountant, broker, or agent in the past two years, they cannot legally serve as your QI (with narrow exceptions). A QI who ignores this rule is showing you they don't take compliance seriously.

Their fees are suspiciously low. A QI charging $200 for a standard exchange is subsidizing their fees with interest income from your funds, or they're cutting corners on compliance and insurance.

They offer investment advice. A QI is a custodian and facilitator. If they're recommending DSTs, properties, or investment strategies, they're either operating outside their role or they have a financial interest in the recommendation.

They can't clearly explain their security measures. If a QI can't tell you exactly where your money is held, what insurance they carry, and how accounts are segregated, that's not confidentiality — it's opacity.

They pressure you on timing or decisions. A QI should facilitate your timeline, not push you toward faster closings or specific properties. Pressure usually means misaligned incentives.

The questions to ask before you commit

Write these down and ask every QI candidate:

1. Where will my funds be held? Bank name and account type?
2. Are client funds segregated or commingled?
3. What is your fidelity bond amount?
4. What is your E&O coverage amount?
5. How many exchanges has your firm completed? Over how many years?
6. What is your fee for a standard deferred exchange?
7. Do you return interest earned on my funds?
8. Who is my dedicated point of contact?
9. What is your process for deadline reminders?
10. Can I reach someone on weekends and holidays? The answers should be clear, specific, and immediate. Any hesitation or deflection is informative.