The qualified intermediary in a 1031 exchange holds your sale proceeds for the entire exchange period, sometimes six figures, sometimes seven, in an account you don't directly control. Most sellers pick whichever intermediary their closing attorney or title company mentions in passing, without ever asking how that company actually safeguards client funds. That's worth changing before the next exchange, not after something goes wrong with one.
Why the intermediary role exists at all
A 1031 exchange requires that you never take actual or constructive receipt of the sale proceeds between selling the relinquished property and closing on the replacement property. If the money touches your bank account, even briefly, the exchange is disqualified and the transaction becomes a taxable sale. The qualified intermediary exists specifically to hold those funds in the interim, under an exchange agreement that legally restricts your access until the replacement property closes.
Because the role is defined by tax code requirements rather than a licensing regime, the qualified intermediary industry is largely unregulated at the federal level. Some states have their own bonding or licensing requirements for intermediaries; many don't. That gap is exactly why the questions below matter more here than they would with, say, a licensed broker-dealer.
Photo by https://kaboompics.com/ on Pexels
Fidelity bond and errors and omissions coverage
Ask directly whether the intermediary carries a fidelity bond and errors and omissions insurance, and at what coverage limits. A fidelity bond protects against employee theft or fraud; errors and omissions coverage protects against mistakes in how the exchange is administered. Neither is legally required in every state, which means the presence or absence of this coverage is a real signal about how seriously a given company treats the risk it's asking you to accept.
How client funds are actually held
Some intermediaries hold exchange funds in a qualified escrow account or qualified trust, structured so the funds are segregated from the company's own operating capital and can't be reached by the intermediary's creditors if the company runs into financial trouble. Others commingle client funds in a general account, which exposes your proceeds to the company's own solvency risk. Asking specifically how your funds would be held, and requesting the account structure in writing, is a reasonable and common question that a professional intermediary should be able to answer without hesitation.
Interest on your exchange funds
Exchange proceeds often sit for weeks or months, and that money can earn interest while it's held. Some intermediaries pass that interest back to you, some keep it as part of their fee structure, and some split it under specific terms. This should be spelled out clearly in the exchange agreement before you sign, not discovered afterward when the closing statement doesn't match your expectations.
Fee structure and what it actually covers
Intermediary fees vary by transaction complexity, single-property exchanges cost less than multi-property or reverse exchanges, and it's worth getting an itemized fee schedule rather than a single bundled number. Some companies charge extra for identification amendments, extensions, or additional replacement properties within the same exchange; knowing this upfront avoids a surprise if your transaction doesn't go exactly according to the original plan.
Company history and transaction volume
How long has the company been operating as a qualified intermediary specifically, as opposed to offering it as a side service alongside title or escrow work? How many exchanges does it process in a typical year? These aren't formal credentials, but they're reasonable proxies for how much institutional experience exists behind the specific exchange you're about to hand off to them, and a company that does this as its core business tends to have more refined processes than one for whom it's an occasional add-on.
State-level oversight varies more than most sellers expect
Because there's no federal licensing regime for qualified intermediaries, several states have stepped in with their own requirements. A handful require a minimum fidelity bond amount, a handful require that exchange funds be held in a qualified escrow account or qualified trust rather than commingled, and some states have no specific requirements at all. Asking which state's rules apply to your specific intermediary, and confirming the company actually meets them rather than assuming it does, is a reasonable step before signing anything, particularly if your intermediary operates in a state without strong baseline requirements.
Photo by David McElwee on Pexels
What happens if the intermediary runs into financial trouble
This is an uncomfortable question to ask, but a reasonable one: what happens to your exchange funds if the intermediary company becomes insolvent while holding them? Whether your funds are protected in that scenario depends heavily on the account structure discussed above, a properly segregated qualified escrow or qualified trust is designed to keep client funds outside the reach of the company's own creditors, while commingled funds are not. There have been real, publicized cases of qualified intermediary failures over the years where sellers lost exchange funds held in improperly segregated accounts, which is precisely why this question is worth asking directly rather than assuming the answer.
Reverse and improvement exchanges add another layer
If you're considering a reverse exchange, buying the replacement property before selling the relinquished one, or an improvement exchange, using exchange funds to build or renovate the replacement property, the intermediary's role expands. In a reverse exchange, an exchange accommodation titleholder, often an affiliate of the qualified intermediary, holds title to one of the properties for the duration of the exchange. Not every intermediary offers this service, and among those that do, the fee structure and risk profile can differ meaningfully from a standard delayed exchange. If either structure is on the table, confirming the intermediary has direct experience with it, not just standard delayed exchanges, is worth doing early.
Photo by Cytonn Photography on Pexels
Timeline coordination and identification deadlines
The 45-day identification period and 180-day exchange period run concurrently from the closing of the relinquished property, and a qualified intermediary's administrative responsiveness during that window matters more than it might seem from the outside. A company that's slow to acknowledge identification notices, confirm wire instructions, or coordinate with a title company on the replacement closing can create real timeline pressure on deadlines that have no extensions available for administrative delay. Asking how the company handles identification notice confirmation, and how quickly they typically turn around fund transfers for a replacement closing, is a practical question with real consequences if the timeline is tight.
Red flags worth taking seriously
A few patterns are worth treating as reasons to keep looking rather than proceed: reluctance to provide the exchange agreement in advance of signing, vagueness about how funds are specifically held, an inability to name the bank or trust company where funds are actually deposited, or pressure to sign quickly without time to review terms. None of these alone are proof of a problem, but a company confident in its own practices generally has no reason to avoid answering any of them directly and promptly.
Photo by Kindel Media on Pexels
Coordination with your other advisors
A qualified intermediary handles the mechanics of holding funds and preparing exchange documents, but it typically doesn't provide tax or legal advice about whether a given exchange structure fits your broader financial picture. That coordination sits with your tax advisor and, depending on the complexity of the transaction, an attorney familiar with 1031 rules (the American Bar Association maintains a real property, trust, and estate law section if you're looking for attorneys with this specific background). Confirming ahead of time who owns which piece of the process, the intermediary, your CPA, your attorney, avoids gaps where each professional assumes someone else is handling a given detail.
Questions worth writing down before your first call
- What fidelity bond and errors and omissions coverage do you carry, and at what limits?
- How are exchange funds held, segregated escrow, qualified trust, or a general account?
- What happens to interest earned on my funds during the exchange period?
- What's the full, itemized fee schedule, including amendments and extensions?
- How many 1031 exchanges does your company typically handle in a year?
- Can you provide the exchange agreement in advance, before I'm under time pressure to sign it?
A qualified intermediary that answers all six clearly and in writing is telling you something useful about how the rest of the transaction is likely to go.
Where this fits into a broader exchange conversation
Choosing an intermediary is one piece of a larger set of decisions in a 1031 exchange, alongside identification timing, replacement property selection, and whether a delaware statutory trust or direct property ownership better fits your situation. Coordinating early with a 1031 and DST advisor and your tax advisor, rather than treating the intermediary selection as a standalone task handled at the last minute, tends to produce a smoother transaction overall.
For background on the underlying tax rules, the IRS's own guidance on like-kind exchanges is the primary source, and the Federation of Exchange Accommodators, the industry's main professional association, publishes a code of ethics and standards that member intermediaries agree to follow, worth checking against any company you're evaluating. Wikipedia's entry on like-kind exchanges is also a reasonable plain-language starting point if the terminology in your closing documents is unfamiliar.
If you're not sure what to ask a financial advisor before you even get to the intermediary conversation, Capivise's questions to ask an advisor page and advisor verification resource cover the broader due diligence process, and Capivise can help connect you with advisors experienced in exchange transactions if you're starting that search from scratch.
