A qualified intermediary (QI) is a neutral party who may assist a landowner in facilitating a like-kind exchange. The QI enters into a written agreement, known as the exchange agreement, with the landowner. Under the agreement, the QI acquires the landowner’s property from the landowner, transfers that property, acquires the replacement property, and transfers the replacement property to the landowner.
The QI can also be known as a facilitator or exchange accommodator. The QI serves a crucial function under the Internal Revenue (IRS) Code. Choosing an Intermediary to facilitate the 1031 exchange is usually the first and one of the most important steps. The QI should be a company that works on a full-time business of facilitating 1031 exchanges. The Internal Revenue (IRS) Code requires that the person or entity serving as QI cannot be someone with whom the exchanger has had a former business or family relationship prior to the transaction. The IRS code is clear in the fact that a QI has to be an independent organization whose only contact with the exchanger is to serve him as a Qualified Intermediary.
A tax professional can help a landowner determine whether a QI is necessary to facilitate a particular like-kind exchange, and whether a specific party can serve as a QI. The QI industry is largely unregulated, so a landowner should be very careful in choosing a QI.
Broadly speaking, a QI can’t be the landowner, a relative of the landowner, the landowner’s agent, including his lawyer or real estate agent, or any other similar representative.
The Qualified Intermediary ("QI") is one of the safe harbors created as part of the regulations adopted following passage of the Tax Reform Act of 1986. The Act places limits on who can act as a QI, the QI cannot be the Taxpayer or a "disqualified person:
- a "disqualified person" is one who, within the two-year period ending with the disposition of the Relinquished Property, has acted as the Taxpayer's:
- investment banker or broker
- real estate agent or broker
Use of a disqualified person as accommodator means that he is treated as Taxpayer's agent for purposes of receipt of exchange proceeds, thus jeopardizing the exchange.
A taxpayer should use extreme care when selecting a QI, financial stability of the QI is a prime consideration.
QIs can differ significantly as to the degree of service they will be providing, and you should take that factor into account when comparing fees. Some intermediaries simply send out blank forms, and the taxpayer is on his own to complete them properly.
When the taxpayer engages the services of a QI, pursuant to an exchange agreement, the IRS does not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent who deeds the property directly to the taxpayer.
Without a QI, and pursuant to an exchange agreement, the IRS may not define a transaction as an exchange, thereby making it ineligible for tax deferment status.
Always make sure your QI is bonded and insured