What is a Qualified Intermediary?

When considering Delaware statutory trust (DST) investments and Section 1031 exchanges, it is important to understand the many relationships and roles of the parties. We frequently hear questions about the necessary participants in a Section 1031 exchange. Specifically, questions repeatedly arise about the role of a qualified intermediary.

Sometimes referred to as an “exchange accommodator,” a qualified intermediary (QI) facilitates Section 1031 exchanges, such as DST exchange investments. To qualify for 1031 exchange treatment, taxpayers must avoid actual or constructive receipt of the proceeds of sale from the relinquished property. This is not an issue because the regulations provide a “safe harbor” for taxpayers who use a QI.

The following is an introduction to QIs for owners considering a Section 1031 exchange.

What is a qualified intermediary?

A QI is an independent third-party that facilitates the exchange, helping to ensure that the rules are followed and deadlines are satisfied. The QI is frequently an affiliate of a bank, title or escrow company. The use of a QI to facilitate exchanges has become commonplace across the nation.

The QI prepares a customary Exchange Agreement, holds the proceeds of sale from the relinquished property and disburses the proceeds upon written direction from the exchanger to acquire the replacement property.

Who cannot serve as a qualified intermediary?

To qualify for the safe harbor, the QI cannot be related to the taxpayer, nor can they have a financial relationship with the taxpayer within two years of closing on the exchange. This means your CPA, financial advisor or lawyer should not serve as your qualified intermediary. Also, while QIs have an important role to play, they do not give specific tax advice on your transaction.

What should you look for in a qualified intermediary?

You should use an experienced QI with a track record of completing exchanges. The rules are complex and can be unforgiving. An experienced QI brings a high level of expertise on the technicalities to complete the exchange in an orderly manner. Many QIs are members of the Federation of Exchange Accommodators, an association that encourages training, education and high ethical standards. 

Where can I find a qualified intermediary for my 1031 exchange/DST investment?

The Capital Square team has a list of preferred QIs. These are proven experts with whom we have established strong working relationships over many years.

To learn more, call or connect with us today. We’d be happy to assist you.