One of the first steps when considering a 1031 exchange for your rental property is to find a qualified 1031 exchange intermediary. Their role is critical to this like-kind exchange real estate investing strategy, which allows you to defer paying capital gains taxes.
To help you understand what they do, we’ve broken down the basics about the 1031 exchange qualified intermediary role, including responsibilities, fees, and tips for finding a good one.
Quick Answer: What is a Qualified Intermediary for a 1031 Exchange?
A Qualified Intermediary (QI), also referred to as a 1031 exchange facilitator, is a neutral third party that the IRS requires to facilitate 1031 exchanges. They hold your sale proceeds, prepare legal documents, coordinate closings, and ensure compliance with IRS rules. Without a QI, you cannot complete a valid 1031 exchange.
Key Facts About 1031 Exchange Qualified Intermediaries
Do I need one? Yes. A QI is required by law for all 1031 exchanges. You must hire them before closing on your sale.
What do they cost?
- Initial fees: $600-$1,200
- Additional properties: $200-$400 each
- Interest income on held funds (typically the largest fee component)
What do they do? Hold sale proceeds, transfer properties, coordinate with title companies and attorneys, prepare 1031 exchange documents, and verify IRS compliance throughout the 45-day and 180-day deadlines.
Who cannot be your 1031 exchange facilitator? Your attorney, accountant, real estate broker, employer, or family members are all disqualified.
How do I find one? Look for a 1031 exchange qualified intermediary with a proven track record of thousands of successful exchanges, positive reviews, and experience with your specific exchange type (delayed, reverse, or construction).
Ready to connect with a vetted 1031 exchange qualified intermediary? RealWealth members get access to trusted 1031 exchange professionals →
What is a 1031 Exchange Qualified Intermediary?
A Qualified Intermediary (QI) is sometimes referred to as an “Exchange Facilitator” or “Exchange Accommodator.” In essence, 1031 exchange qualified intermediaries act as third-party fiduciaries, managing or holding money or assets on behalf of another person.
A fiduciary is a trusted relationship between a trustee and a beneficiary. The 1031 exchange facilitator ensures that all rules are followed and deadlines are met to maintain compliance with the IRS’s exchange process.
Is a Qualified 1031 Exchange Intermediary Required For a Like-Kind Exchange?
The short answer is yes. Whenever an investor pursues a like-kind exchange strategy, they must enter into an agreement with a 1031 exchange qualified intermediary before selling their existing property. The main reason is that the investor cannot access the money from the sale of their property at any time during the exchange process.
Instead, the funds are held by a qualified intermediary for a 1031 exchange, which facilitates the exchange to protect tax-deferral benefits and finalize the process. If an investor does not utilize a QI or has possession of the funds from the sale at any time, they’ll be disqualified from doing a 1031 exchange, and any profits will be taxed as capital gains.
Terms to know: “Relinquished” property refers to the asset you sell or give up. “Replacement” property refers to the property you are buying to replace the one you are selling.
Want to learn more about the 1031 exchange process? Watch our 1031 Exchange Masterclass webinar.
What Does a 1031 Exchange Facilitator Do?
A qualified intermediary for a 1031 exchange is responsible for several tasks during the exchange timeline. Along with holding the money throughout the exchange process and understanding 1031 exchange rules, their key duties include:
- Obtain the relinquished property from you
- Transfer the relinquished property to the new buyer
- Obtain the replacement property from the seller and transfer the replacement property to you
- Support the investor throughout the exchange process
- Coordinate with you, your accountant, and your real estate attorney
- Handle all deposits and disbursements from the sale proceeds
- Help prepare legal paperwork and tax documents
- Give instructions and necessary documents to the title company
- Manage the property closings
- Verify that your like-kind exchange follows the IRS’s guidelines
As you can see, using a 1031 exchange qualified intermediary is not only required to complete a successful 1031 exchange, but they can also be an invaluable resource to help you avoid the many risks associated with like-kind exchanges. This is why it’s so important to find an experienced 1031 exchange facilitator.
Who Can Be a Qualified Intermediary For a 1031 Exchange?
The IRS hasn’t outlined rules on who can be a qualified intermediary for a 1031 exchange. However, some rules disqualify someone from being one. For instance, if someone has acted as your “agent” at any time during the last two years, they will not qualify.
Here are additional rules that disqualify someone from becoming your 1031 exchange facilitator:
- Yourself
- Your employer
- Your attorney
- Your tax advisor
- Your real estate broker
- Your investment broker
- Your family members
Because a 1031 exchange qualified intermediary acts as a third party, they must be completely neutral and independent. There must be no prior relationship between you and your QI, or the exchange will be invalid and thus taxable.
What are 1031 Exchange Facilitator Fees?
The total cost of conducting a like-kind exchange can vary depending on the type of exchange you choose to undertake. For example, if you are undertaking a Reverse 1031 exchange, the fees may be higher than those associated with a more popular Delayed exchange strategy. Reverse exchanges can present additional risks and costs due to their complexity.
The complexity depends on the type of exchange you are conducting and the amount you can expect to pay for a QI. The more properties involved in the exchange, the higher fees you’ll likely incur.
Three Types of 1031 Exchange Qualified Intermediaries
The fee charged by a 1031 exchange facilitator depends on whether they work for an institution or an independent company. Banks or title insurance companies typically offer “Institution” QI services, while “Non-Institution” QIs are independently owned companies. These independent companies provide exchange services but aren’t subsidiaries of a bank.
Online companies that specialize in 1031 exchanges are generally non-institutional QIs. Small law firms and large national firms may be either institutional or non-institutional QIs. Each type of 1031 exchange facilitator offers differing levels of service, cost, efficiency, and expertise.
Two Sets of 1031 Exchange Facilitator Fees
The first set of fees that a Qualified Intermediary will charge will cover the initial transaction—the transfer of your relinquished property to your replacement property. These upfront costs are referred to as set-up and administrative fees. If the exchange involves multiple properties, additional costs may be incurred for each property.
1. Setup & Administrative Fees
Generally speaking, institutional 1031 exchange qualified intermediaries charge an initial transaction fee ranging from $800 to $1,200. The QI may also charge between $200 and $400 for each additional property participating in the exchange.
To incentivize investors, non-institutional 1031 exchange qualified intermediaries who work for independent companies often charge lower upfront fees. Initial fees generally range from $600 to $800.
It’s essential to note that these upfront fees account for only about a third of the total compensation a 1031 exchange facilitator receives for working on an exchange. This goes for both institutional and non-institutional QIs. Interest income makes up the other two-thirds (ish) of a QI’s profits.
2. Interest Income
The second and most substantial way a 1031 exchange qualified intermediary makes money is through interest earnings. A key job of the QI is to hold the funds from the sale of the relinquished property until a new property has been purchased (typically 180 days). These funds earn interest throughout the entire 1031 exchange process. When an exchange is complete, the QI will take a percentage of the interest income as their second fee.
Example: You sold an investment property and got $400,000, which was transferred to your 1031 exchange facilitator to hold. Investors have up to 180 days to complete the transaction. Let’s say you take the entire time to find and purchase a replacement property. During those 180 days, the 1031 exchange facilitator relinquished property funds into an interest-earning account. If the interest rate is 2 percent, the interest income would be $4,000. The QI would take all or a portion of that interest income as part of their fee structure.
Some 1031 exchange qualified intermediaries charge higher upfront fees but take a lower percentage of interest income. Others may offer lower set-up fees but take a higher percentage of interest income.
Investor tip: Because QI fees can be structured differently (institutional vs non-institutional), make sure you know exactly what services you’ll be paying for during your 1031 exchange before entering an agreement.
3. Other Fees
In addition to income interest, setup, and administrative fees, you should be aware of other miscellaneous costs that may arise during the exchange process. Items such as courier fees, overnight delivery fees, and wire transfer fees may appear on the final bill from your 1031 exchange qualified intermediary.
How to Find a Qualified Intermediary For a 1031 Exchange
A QI should be highly experienced with the type of 1031 exchange you wish to accomplish. Ideally, your 1031 exchange facilitator has performed thousands of successful exchanges and has lots of positive client reviews. Here are a few ideas for how to find a great one:
- Get a referral from an escrow officer, friends, or family
- Research online
- Check out client reviews on third-party sites
- Join RealWealth and schedule a strategy session with your investment counselor. They can connect you with a trusted 1031 exchange facilitator (We use them for our transactions, too!) and help you indentify properties quickly.
As different types of 1031 exchanges require more work than others, it is essential to perform your due diligence on any qualified intermediary for a 1031 exchange you are considering. Be sure to understand their fee structure so you won’t be surprised by their final bill.
How RealWealth Can Help With Your 1031 Exchange
The process of a 1031 exchange may seem daunting and sometimes costly, but the tax benefits far outweigh the total cost. That’s why real estate investors continue to use all types of 1031 exchanges to defer paying capital gains taxes. At the same time, they upgrade their investment properties, sometimes doubling their portfolio or acquiring even more doors. A 1031 exchange qualified intermediary plays a critical role in facilitating a successful transaction. That’s where RealWealth can give you an edge.
One of our specialties is helping real estate investors connect with trusted 1031 exchange facilitators and vetted property teams. These teams sell off-market, turnkey properties in growth markets across the U.S. Members also get access to all of our educational content and our list of recommended investor resources, such as lawyers, lenders, and CPAs.
In addition, our RealWealth Investment Counselors are here to support you throughout the process and beyond. If you are unsure of where to invest, they can help you narrow down a market and find replacement properties that fit your goals, whether it’s cash flow, appreciation, or a hybrid approach.
If you need to connect with an experienced 1031 exchange facilitator and want to stress less about finding replacement properties in your 45-day window, join RealWealth today. Membership is 100% free.
