Guides

The Qualified Intermediary Role

A qualified intermediary, often called a QI or accommodator, is the independent party that stands between your relinquished property sale and your replacement property purchase so that you never take actual or constructive receipt of your own exchange proceeds. Receipt of funds by the taxpayer, even briefly, is generally what disqualifies an exchange under the governing Treasury regulations, so the safe harbor role the qualified intermediary occupies is not a convenience, it is the mechanism that makes deferral possible at all. Before your relinquished property closes, you enter into a written exchange agreement with the qualified intermediary that assigns your rights in the sale contract to them. At closing, sale proceeds are wired directly to the qualified intermediary and held, typically in a segregated or qualified escrow or trust account, until they are needed to acquire the replacement property. The qualified intermediary also prepares the assignment documents for the replacement property purchase contract and disburses funds directly to the closing table when that transaction closes, again without the funds ever passing through the taxpayer's hands. Not just anyone can serve in this role. Treasury regulations disqualify certain parties from acting as your qualified intermediary, including your attorney, accountant, real estate agent, or employee, if that person or firm has acted as your agent in a professional capacity within the two years preceding the exchange. This disqualified person rule exists to prevent someone with an existing fiduciary relationship to you from also controlling your exchange funds, which the Internal Revenue Service views as too close to constructive receipt. Because qualified intermediaries hold significant sums of client money, often for weeks at a time, the selection of a reputable firm matters a great deal; the industry has seen isolated but serious cases of qualified intermediary insolvency or fraud, so investors should confirm fidelity bonding, errors and omissions insurance, and how client funds are segregated before signing an exchange agreement. For Seattle, WA investors, we help coordinate the qualified intermediary selection and documentation process alongside your closing attorney or escrow officer, while making clear that we do not serve as the qualified intermediary ourselves and always introduce you to an independent, licensed provider for that function. Many qualified intermediaries hold client funds in a qualified escrow account or a qualified trust structured under the applicable Treasury regulations, and some states impose their own licensing or bonding requirements on top of the federal framework, so a provider experienced with your specific transaction type and property location is generally preferable to the lowest-cost option available. Ask any prospective qualified intermediary how long they have operated, whether they carry a fidelity bond specifically covering client exchange funds, and whether that coverage amount is adequate relative to the size of your transaction, since general business insurance is not the same protection.