The Qualified Intermediary Role

A Qualified Intermediary, sometimes called an accommodator, is a required participant in nearly every 1031 exchange, and understanding what this role does, and does not do, is essential for any investor in Jacksonville considering a like-kind exchange. Under the safe harbor rules found in the federal tax regulations governing Section 1031, an investor cannot simply sell a relinquished property, hold the proceeds personally, and then buy a replacement property later, even briefly. Doing so constitutes actual or constructive receipt of the sale proceeds, and constructive receipt disqualifies the exchange entirely, converting the transaction into an ordinary taxable sale.

The Qualified Intermediary exists to prevent that outcome. Before the relinquished property closes, the investor enters into a written exchange agreement with the Qualified Intermediary, and the intermediary is assigned the investor's rights under the purchase and sale contract for the relinquished property. At closing, the net sale proceeds are wired directly to an account controlled by the Qualified Intermediary rather than to the investor, which is what allows the investor to avoid actual or constructive receipt of the funds. The intermediary then holds those funds, typically in a segregated or qualified escrow or trust account, until the investor identifies and closes on replacement property.

When the investor is ready to close on the replacement property, the Qualified Intermediary is again assigned the investor's rights under that purchase contract, and the intermediary wires the exchange funds directly to the closing agent or title company to complete the purchase. At no point in a properly structured exchange do the sale proceeds pass through the investor's own bank account. The intermediary also prepares and maintains the documentation the Internal Revenue Service expects to see if the exchange is ever reviewed, including the exchange agreement, assignment documents, and a record of the written identification notice delivered within the forty-five day period.

Not every party involved in a transaction can serve as the Qualified Intermediary. The federal regulations disqualify anyone who has acted as the investor's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the relinquished property closing, as well as certain family members and related entities. This is why investors typically engage an independent, third-party Qualified Intermediary company rather than relying on their own closing attorney or accountant to hold the funds, even when that professional is otherwise deeply involved in the transaction.

Selecting a Qualified Intermediary is not a decision to make at the last minute. Because the intermediary will be holding potentially substantial sale proceeds for weeks or months, investors in the Jacksonville market should confirm how the intermediary safeguards funds, whether accounts are segregated per client or commingled, what fidelity bond or insurance coverage is in place, and how the intermediary handles interest earned on the held funds. The exchange agreement, assignment paperwork, and identification notice all need to be executed before the relinquished property closing, which means the Qualified Intermediary should be engaged well before the closing date, not on the morning of settlement.

We coordinate directly with bonded, independent Qualified Intermediaries on behalf of Jacksonville-area investors, handling the scheduling of exchange agreement execution, confirming assignment documents are in place before each closing, and making sure the intermediary has everything needed to disburse funds on time for both the relinquished property sale and the replacement property purchase.

Investors often ask what happens to the interest earned while the Qualified Intermediary is holding exchange proceeds, which can be a meaningful amount on a larger commercial sale held for several weeks or months. Depending on how the intermediary structures its accounts, interest earned may be paid to the investor, retained by the intermediary as part of its fee structure, or handled through a qualified escrow arrangement with specific interest allocation terms spelled out in the exchange agreement. This should be clarified in writing before the exchange agreement is signed, along with the intermediary's fee schedule, so there are no surprises when the final accounting is provided at the close of the exchange.

Security of funds is another area investors in the Jacksonville market should evaluate carefully before selecting a Qualified Intermediary. Because the industry is not subject to a uniform federal licensing or bonding requirement in every state, the level of protection varies significantly between intermediary companies. Relevant questions include whether client funds are held in segregated accounts specific to each exchange rather than commingled with other clients' funds, whether the intermediary carries a fidelity bond and errors and omissions insurance, whether written authorization from the investor is required before any funds are released, and how long the intermediary has been operating. A Qualified Intermediary that will not answer these questions in writing before an exchange agreement is signed is not a business relationship worth entering for a transaction that may involve substantial sale proceeds.

Finally, the Qualified Intermediary's role does not end when the replacement property closes. A reputable intermediary provides the investor and the investor's CPA with a complete accounting of funds received and disbursed, along with copies of all exchange documentation, which becomes part of the recordkeeping the investor should retain to support the exchange if it is ever reviewed. We make sure this final documentation package is delivered and organized before considering an exchange engagement complete.