Real Estate Tax Calc
Why a qualified intermediary is required
The fundamental tax rule underpinning the 1031 exchange is that the investor cannot be in "constructive receipt" of the sale proceeds at any point between the sale of the relinquished property and the purchase of the replacement property. Constructive receipt means that the money is available to you, under your control, or set aside for your benefit—even if you haven't physically touched it. If you receive the proceeds into your bank account, even for a moment, you have been in constructive receipt, and the exchange fails. All of the deferred gain becomes taxable income in that year.
The IRS created the qualified intermediary safe harbor specifically to solve this problem. By having an independent third party (the QI) hold the funds, the investor never has access to the money during the exchange period. The QI effectively steps into the investor's shoes—receiving funds, holding them, and disbursing them—while the investor directs the transactions without ever touching the proceeds.
What a 1031 exchange company does
A full-service QI typically handles the following tasks:
Exchange agreement: Prepares and executes an exchange agreement with you before the relinquished property closes. This document establishes the QI's role and responsibilities.
Assignment of sale contract: The QI is assigned your rights under the relinquished property sale contract, making the QI the legal seller of the property (in exchange documents), not you directly.
Receipt and safekeeping of funds: The QI receives all net proceeds from the relinquished property closing via wire from the title company. Funds are typically held in a separate, segregated account—not commingled with the QI's general funds.
Identification notice support: The QI receives your written identification of replacement properties within the 45-day deadline and may provide templates and deadline reminders.
Assignment of purchase contract: For the replacement property, the QI is assigned your rights under the purchase contract, making the QI the legal buyer in the exchange documents.
Disbursement of funds: The QI wires exchange funds to the replacement property closing. If you are adding cash to the transaction (buying up), you wire your additional cash directly to closing; the QI handles only the exchange funds.
Form 8824 data: A good QI provides a closing statement and exchange summary that includes all the numbers your CPA needs to complete Form 8824.
Worked example: QI in action
An investor owns a single-family rental that sells for $500,000. The mortgage balance at closing is $150,000, so net proceeds after payoff are $350,000. The investor wants to exchange into a $600,000 commercial building.
Day 0 — Close relinquished property: The title company wires $350,000 directly to the QI's exchange account. The investor receives nothing. The 45-day and 180-day clocks start immediately.
Days 1–45 — Identification period: The investor tours replacement properties. On Day 42, the investor submits a written identification notice to the QI listing three properties: a $600,000 retail strip, a $550,000 industrial building, and a $580,000 apartment. All three are validly identified under the 3-Property Rule.
Days 46–180 — Under contract and closing: The investor goes under contract on the $600,000 retail strip. The purchase price exceeds the relinquished property proceeds, so no boot arises. The investor wires an additional $250,000 of personal funds directly to the closing, while the QI wires $350,000 of exchange funds. The total acquisition cost is $600,000.
Result: No cash boot received. The entire gain on the relinquished property is deferred. The QI's fee for the exchange: approximately $1,200.
Who is disqualified from serving as QI
Treasury Regulations are explicit about who cannot serve as your QI. The following are "disqualified persons" and cannot act as your QI:
Your attorney (who represented you in a real estate transaction within the prior two years), your CPA or financial advisor (same two-year window), your real estate agent or broker who represented you in the relinquished or replacement property transaction, any of their employees or related entities, and family members (spouses, ancestors, lineal descendants, and siblings).
The purpose of this rule is to ensure the QI is truly independent—not someone who would let you improperly access funds or who has a prior agency relationship with you.
How to choose a qualified intermediary
Unlike attorneys or CPAs, QIs are not federally licensed. The industry is largely self-regulated, though some states (notably California, Nevada, Oregon, Washington, Colorado, and Idaho) have enacted QI-specific legislation requiring fidelity bonds, insurance, or other protections. When selecting a QI, consider the following:
Financial security: Ask where exchange funds are held and what insurance or bonding is in place. Look for QIs that hold funds in separate FDIC-insured accounts (understanding the $250,000 per-depositor insurance limit) or in US Treasury instruments. Avoid QIs that co-mingle funds or invest in speculative instruments.
Experience and reputation: Look for QIs that are members of the Federation of Exchange Accommodators (FEA), the industry trade group, and who hold the Certified Exchange Specialist (CES) designation. Ask for references and check for any regulatory actions.
Fee transparency: Understand all fees: the flat exchange fee, wire transfer fees, and any additional fees for multi-property or reverse exchanges. Be cautious of QIs with unusually low fees that may compensate through opaque float arrangements.
Responsiveness: During a 1031 exchange, 45 days passes quickly. Your QI needs to be reachable and responsive, especially around identification deadlines and closing coordination.
Costs of using a qualified intermediary
For a standard forward deferred exchange (the most common type), QI fees typically range from roughly $500 to $1,500 per exchange. This fee covers document preparation, fund safekeeping, and administrative support for a single relinquished property and single replacement property. Additional fees may apply for:
Each additional replacement property identified or acquired; reverse exchanges (where the replacement is acquired before the relinquished property is sold), which often cost $3,000 to $6,000 or more; improvement exchanges (also called build-to-suit exchanges); and each wire transfer (often $20–$50 per wire).
In addition to the flat fee, the QI typically earns interest (float income) on the exchange funds held during the exchange period. Many QIs credit a portion of this interest back to the investor; others retain it entirely. Ask about the interest policy before signing.
Frequently asked questions
What does a 1031 exchange company do?
A 1031 exchange company (qualified intermediary) signs an exchange agreement with the investor, receives all sale proceeds from the relinquished property closing, holds those funds in a segregated account, and wires them to the replacement property closing. They also prepare required exchange documents and track the 45-day and 180-day deadlines.
How much does a qualified intermediary cost?
Most QI companies charge a flat setup fee for a standard deferred exchange, typically ranging from roughly $500 to $1,500 for a single-property exchange. Some charge additional fees for complex exchanges (reverse, improvement, multiple properties), wire transfers, and notarized documents. The QI also earns float income on the funds while held.
Who cannot be your qualified intermediary?
Treasury Regulations §1.1031(k)-1(k) prohibit certain disqualified persons from serving as QI: the investor's agent (attorney, CPA, real estate agent, employee) within the prior two years, and any entity related to those agents. Family members are also disqualified. Always use an independent third-party QI company.
Is there FDIC insurance on funds held by a QI?
This varies by QI. Some QIs hold exchange funds in FDIC-insured bank accounts (up to $250,000 per depositor), while others use money market funds or other instruments without FDIC coverage. For large exchanges, ask your QI exactly where funds are held and what insurance applies. QI insolvencies have occurred—vet your QI carefully.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.