The Qualified Intermediary Role

A Qualified Intermediary, often abbreviated as QI, is the independent party that holds exchange proceeds and facilitates the transfer of both the relinquished and replacement properties in a Section 1031 exchange. The role exists because of a foundational rule under the safe harbor regulations. An investor who takes actual or constructive receipt of sale proceeds, even briefly, disqualifies the entire exchange, converting it into a taxable sale. To avoid this outcome, the investor assigns the rights in the purchase and sale agreements to the Qualified Intermediary before closing, and the Qualified Intermediary holds the net proceeds in a qualified escrow account or qualified trust account until they are used to acquire replacement property. For investors in Baltimore, MD, this means the settlement agent wires sale proceeds directly to the Qualified Intermediary at closing rather than to the investor, and the Qualified Intermediary later wires funds to the closing agent for the replacement property purchase. Not just anyone can serve in this role. The regulations disqualify certain parties from acting as the Qualified Intermediary for a given exchange, including the investor's employee, attorney, accountant, real estate agent, or broker who has provided services to the investor within the two years preceding the exchange, as well as anyone related to the investor under the family and entity attribution rules. Access to exchange funds by the investor is restricted under the so called g six limitations, which generally prohibit the investor from receiving, pledging, borrowing, or otherwise obtaining the benefit of exchange funds before the earlier of the identification deadline passing without a valid identification, the replacement property closing, or the one hundred eighty day period expiring. Beyond holding funds, a Qualified Intermediary typically prepares the exchange agreement, assignment documents, and identification notice, and coordinates timing between escrow, title, and lenders on both transactions. A Qualified Intermediary is not a tax advisor or legal counsel, and does not provide tax return preparation or legal opinions regarding the transaction. For investors in Baltimore, MD, coordination with the Qualified Intermediary also matters because Maryland requires withholding at closing on real property sales by nonresident sellers, and documentation showing a valid like kind exchange is in process can affect how that withholding is handled at settlement. We help investors select an appropriately independent Qualified Intermediary, prepare the assignment and exchange agreement paperwork in advance of closing, and coordinate communication between the Qualified Intermediary, the settlement agent, and any lender involved in the transaction.