How to Choose a Qualified Intermediary: The Complete Checklist

Choosing a qualified intermediary is a custody decision. Your QI will hold six- or seven-figure proceeds for up to six months, and you will have no legal access to those funds during that period. The due-diligence process below is organized into must-haves, red flags, and the specific questions to ask before you sign an exchange agreement.

What a QI does

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

1. Holds sale proceeds. When the relinquished property closes, the proceeds go directly to the QI. This custody arrangement is what prevents constructive receipt, the IRS rule that would disqualify your exchange if you touched the money.
2. Manages exchange paperwork. The QI prepares the exchange agreement, coordinates with title and escrow to route proceeds correctly, receives and timestamps your written identification, and releases funds when you close on the replacement.
3. Tracks deadlines. A reliable QI sends deadline reminders, confirms identification receipt, and ensures the mechanical steps of the exchange stay on schedule.

A QI does not provide tax advice, legal advice, or investment recommendations. If a QI is recommending specific properties or giving tax opinions, that is a role conflict, not a feature.

Must-haves

1. Segregated, qualified escrow accounts

This is the single most important factor. Your funds must be held in a separate account, not commingled with the QI's operating funds or other clients' money.

• The account should be at an FDIC-insured bank.
• It should be established in the QI's name in their capacity as qualified intermediary for you (e.g., "Acme QI Services, as QI for [Your Name]").
• Commingling is the biggest risk in the QI industry. If a QI commingles funds and faces financial difficulty, your money is exposed in bankruptcy proceedings.

2. Fidelity bond

A fidelity bond protects against employee theft or fraud within the QI firm. If an employee diverts your funds, the bond covers the loss up to the policy limit. Ask for the coverage amount. A QI holding tens of millions in client funds should carry coverage in the millions, not a token $100,000 bond.

3. Errors-and-omissions (E&O) insurance

E&O coverage protects against processing mistakes: a deadline miscalculation, a misrouted wire, a paperwork error that damages your exchange. Ask for the policy limit and confirm it is current.

4. Dual-authorization disbursement controls

Reputable QIs require two officers to approve any wire disbursement. This prevents a single employee from unilaterally moving funds. Ask specifically: "How many people must approve a wire release, and what is the verification process?"

5. Written disbursement procedures

The QI should have documented procedures for how funds are released: what authorization is required from you, how instructions are verified (phone callback, not just email), and what audit trail is maintained. Ask to see these procedures in writing before you sign.

6. Independent audit or SOC report

QIs that handle significant volume should undergo annual independent audits or maintain a SOC 1 or SOC 2 report. This provides third-party verification that their controls work as described. Ask: "Are your financials independently audited? Do you have a SOC report?"

7. Cybersecurity controls

Wire fraud targeting 1031 transactions is a real and growing threat. Ask what the QI does to protect against business email compromise: encrypted communications, verified callback procedures for wire instructions, multi-factor authentication on accounts, and employee training on phishing. See the wire fraud prevention guide for more detail.

Red flags

Fee structure and the interest question

QI fees for a standard deferred exchange typically range from $750 to $1,500. Reverse and improvement exchanges run $2,000-$5,000 or more.

An important variable is interest earned on held funds. Your QI earns interest on proceeds sitting in escrow. Some QIs return all interest to the client. Some keep it as part of their compensation model (which is why their upfront fee may be lower). Some share it. There is no universally correct answer, but you should know the terms.

Example: A QI charging $500 who keeps all interest on $500,000 held for four months at 4% earns roughly $6,700 from your funds. A QI charging $1,200 who returns all interest costs you $1,200 net. The lower-fee QI is actually more expensive.

Ask every candidate: "Do you return interest earned on my escrow funds, and if so, how is that calculated?"

Questions to ask before you commit

Use this list during your evaluation. The answers should be specific, immediate, and confident.

Fund security:

1. Where will my funds be held? What bank, what account type?
2. Are client funds segregated or commingled?
3. What is your fidelity bond coverage amount?
4. What is your E&O coverage amount?
5. How many people must approve a wire disbursement?
6. What are your written disbursement procedures?
7. Are your financials independently audited? Do you have a SOC report?

Cybersecurity: 8. How do you verify wire instructions (phone callback, secondary channel)? 9. Do you use encrypted email for sensitive documents? 10. What training do your employees receive on business email compromise?

Experience and stability: 11. How many exchanges has your firm completed, and over how many years? 12. Has the firm operated through a real-estate downturn (2008, 2020)? 13. Who will be my dedicated point of contact?

Fees and interest: 14. What is your fee for a standard deferred exchange? 15. Do you return interest earned on my funds? How is it calculated?

Service: 16. What is your process for deadline reminders? 17. Can I reach someone on weekends and holidays?

If a QI hesitates on any of these questions, that is informative. The firms that take custody seriously will answer all of them without difficulty.