The Role of a Qualified Intermediary in a 1031 Exchange

When it comes to completing a successful 1031 exchange, there’s one player who quietly ensures everything goes according to IRS regulations — the Qualified Intermediary (often called a QI).

But what exactly do they do, and why are they so important?

If you’re considering a 1031 exchange to defer capital gains taxes on your real estate investment, understanding the QI's role is critical.

🧠 What Is a Qualified Intermediary (QI)?

A Qualified Intermediary is a neutral third party who facilitates the exchange process under IRS guidelines.

They:

• Prepare legal exchange documents

• Hold and protect the proceeds from your sale

• Coordinate deadlines and paperwork

• Ensure IRS compliance from start to finish
  
  

Most importantly, they prevent you—the investor—from receiving the sale proceeds directly, which would disqualify your exchange immediately.

The QI is the backbone of a compliant 1031 exchange.

🚫 You Cannot Do It Alone

Per IRS regulations, you’re not allowed to touch the funds from your sold property—not even for a day.

Without a QI:

• You receive the money = Taxable event

• The exchange is invalid = You owe capital gains tax

This is why the QI must be in place before the sale closes.

🧾 Here’s What a QI Actually Does (Step-by-Step)

1. Drafts Exchange Documents

Before your property closes, your QI will:

• Prepare an Exchange Agreement

• Draft the Assignment of Sale Contract

• Create a Notice of Assignment to all parties involved

2. Holds Sale Proceeds in a Secure Account

Once the sale closes, the QI:

• Receives the funds directly

• Places them in a segregated, FDIC-insured account

• Keeps them untouched until it's time to purchase the replacement property

3. Monitors and Manages IRS Deadlines

There are two strict timelines:

• 45 days to identify new property

• 180 days to close on it

Your QI:

• Tracks these windows

• Verifies identification letters

• Ensures all documentation is timestamped and compliant

4. Releases Funds to Buy the Replacement Property

Once you're ready to close on your new investment, the QI:

• Coordinates wiring the funds to escrow

• Finalizes the Assignment of Purchase Contract

• Ensures the exchange is completed within 180 days

🛡️ How to Choose the Right Qualified Intermediary

Not all QIs are created equal. Look for:

• Experience in real estate transactions and 1031 exchanges

• Security protocols for handling your funds

• Transparent fees with no hidden costs

• Proven compliance with IRS regulations

Pro tip: Avoid using your real estate agent, attorney, or CPA as your QI. The IRS prohibits anyone with a fiduciary relationship with you in the past two years from acting as your QI.

⚠️ What Happens If You Skip the QI?

Skipping or mishandling the intermediary process can result in:

• Disqualification of the exchange

• Full capital gains tax liability

• Potential interest and penalties from the IRS

In short — it’s not worth the risk.

💼 Final Thoughts

The Qualified Intermediary is your silent partner in a 1031 exchange. While they don’t choose your properties or offer tax advice, they make sure your transaction is 100% IRS-compliant — so you can focus on growing your portfolio and deferring taxes legally.

👋 Need a Trusted QI or Expert Guidance?

At Giang Group, we work hand-in-hand with experienced Qualified Intermediaries to help investors like you complete smooth, tax-deferred exchanges in Santa Clara County and beyond.

Curious if your next transaction qualifies for a 1031 exchange?

Let’s talk — Schedule a strategy call today.