The Qualified Intermediary Role

A qualified intermediary is the independent party that holds exchange proceeds between the sale of the relinquished property and the purchase of the replacement property, and its involvement is what allows an exchanger to avoid actual or constructive receipt of those funds, a requirement central to Section 1031 qualifying for tax deferral at all.

Constructive receipt occurs when an exchanger has the right to control or access exchange funds, even without physically taking possession, and if that happens at any point, the entire exchange is disqualified regardless of intent. Routing sale proceeds through a qualified intermediary, rather than through the exchanger's own bank account even briefly, is what prevents this from happening.

Treasury regulations disqualify the exchanger, and certain related parties such as an employee, attorney, accountant, or real estate agent who has served the exchanger within the prior two years, from acting as the qualified intermediary, precisely because those relationships create the risk of the exchanger controlling the funds indirectly.

Using a qualified intermediary who meets the regulatory requirements creates a safe harbor that protects the exchange from being disqualified on constructive receipt grounds, provided the exchange agreement properly limits the exchanger's rights to the funds during the exchange period.

Beyond holding funds, a qualified intermediary prepares the exchange agreement, coordinates the assignment of the purchase and sale contracts, and receives the written identification of replacement property from the exchanger, functioning as the administrative backbone of the exchange from the relinquished property's closing through the replacement property's closing.

The safe harbor protection depends not only on using a qualified intermediary but on the exchange agreement itself properly restricting the exchanger's rights to the held funds during the exchange period; we review this agreement language on every Los Angeles exchange rather than assuming a standard template automatically provides adequate protection.

Before engaging a qualified intermediary, we confirm the firm and its principals have no disqualifying relationship with the exchanger under the Treasury regulations, reviewing whether anyone at the firm has served as the exchanger's employee, attorney, accountant, or agent within the prior two years, since this independence confirmation is a threshold requirement, not an optional diligence step.