The QI's role is to hold and transfer your exchange funds without you ever having "constructive receipt" of them. A mistake by your QI can invalidate the entire exchange, leading to a significant tax bill. To mitigate this risk, it's essential to ask the right questions.
Why QI Selection Is Critical
Your Qualified Intermediary holds your exchange funds and facilitates the transfer between properties. Since QIs are not federally regulated, choosing the right one requires careful due diligence to protect your investment and ensure exchange compliance.
QI Responsibilities
- • Hold and transfer exchange funds safely
- • Ensure IRS compliance throughout process
- • Facilitate property transfers and documentation
Selection Criteria
- • Fee transparency and structure
- • Insurance coverage and fund security
- • Communication and availability
The 6 Essential Questions
What are your fees, and what do they cover?
QI fees can be more complex than they first appear. Understanding the full fee structure is crucial.
Key Points to Clarify:
- Are there additional fees for each replacement property?
- Administrative or service fees for wire transfers and other services?
- How is the interest on my funds handled?
Will I have a dedicated point person, and what is their availability?
Communication is crucial during a 1031 exchange with strict 45- and 180-day deadlines.
Key Points to Clarify:
- Single point of contact vs. rotating team?
- Standard business hours and vacation schedules?
- Availability after hours and on weekends/holidays?
How and where are my funds being held?
The safety and security of your exchange funds are paramount.
Key Points to Clarify:
- Segregated individual account vs. pooled funds?
- Which financial institution holds the accounts?
- What safeguards protect against other client issues?
What is your insurance coverage?
Since the QI industry is not federally regulated, insurance is your primary safeguard.
Key Points to Clarify:
- Errors and Omissions (E&O) insurance coverage?
- Fidelity Bond for employee theft/embezzlement?
- FDIC insurance limits and adequacy for your exchange?
Can you provide professional references?
A QI's reputation and customer service are key indicators of their reliability.
Key Points to Clarify:
- References from investors, agents, and attorneys?
- Experience with similar exchange scenarios?
- Track record with complex exchanges?
What are your documentation and submission procedures?
Knowing the QI's administrative processes is essential when under pressure.
Key Points to Clarify:
- Electronic signature acceptance?
- Requirements for identification list submissions?
- Documentation standards and deadlines?
Understanding QI Fee Structures
QI fees can sometimes be more complex than they first appear. A flat-rate fee for a straightforward exchange is common, but you need to know if there are any hidden costs.
Additional Property Fees
Some QIs charge extra for each replacement property you identify or purchase beyond the first one.
Service Fees
Administrative fees for wire transfers, faxes, overnight deliveries, and other incidental services.
Interest Handling
Some QIs may keep a portion or all of the interest earned on exchange funds they hold.
Fund Security and Account Types
The safety and security of your exchange funds are paramount. Understanding how and where your funds are held can protect you from significant financial loss.
✓ Segregated Accounts (Recommended)
- • Your funds held separately from other clients
- • Protected from other clients' issues
- • Safeguarded against QI bankruptcy
- • Maximum security for your exchange
⚠ Pooled Funds (Higher Risk)
- • Your funds mixed with other clients'
- • Vulnerable to other clients' problems
- • Risk of loss from QI issues
- • Less protection and control
Essential Insurance Coverage
Since the QI industry is not federally regulated, insurance is your primary safeguard against fraud or negligence.
Errors and Omissions (E&O) Insurance
Protects you from financial loss due to administrative mistakes, missed deadlines, or improper procedures by the QI.
Fidelity Bond
Covers losses from employee theft, embezzlement, or other fraudulent activities by QI staff members.
FDIC Insurance Limitations
Bank accounts have FDIC protection up to $250,000 per depositor, per institution, which may not cover large exchanges.
Ready to Start Your 1031 Exchange?
Schedule a free consultation with our 1031 exchange specialists to discuss QI selection and your investment strategy.
Schedule a CallQualified Intermediary Selection: Frequently Asked Questions
Conclusion
Choosing the right Qualified Intermediary is one of the most important decisions you'll make in a 1031 exchange. By asking these six questions, you can properly vet potential QIs and select a partner who is knowledgeable, communicative, and financially secure.
This due diligence will significantly increase your chances of a smooth, successful transaction and the continued growth of your real estate portfolio.
