Choosing a 1031 Qualified Intermediary: Rules, Safeguards, Questions
A 1031 qualified intermediary is an independent party that signs a written exchange agreement with you, takes your place in the sale and purchase, and holds the sale proceeds so you never receive them. Under Treasury Regulation 1.1031(k)-1(g)(4), it can’t be you or a “disqualified person,” which includes anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker in the two years before your sale. In California, an intermediary handling California property must also meet the exchange facilitator law in Financial Code sections 51000 to 51013, including a $1 million fidelity bond, a $1 million deposit or a qualified escrow or trust account.
Choosing the intermediary is the first real decision in a deferred exchange, and it has to happen before your sale closes. The intermediary’s job is narrow but critical: if it mishandles or loses the money, your exchange can fail. This guide covers what the regulations require, who is disqualified, what California adds, what happened when intermediaries failed, and the questions to ask before you sign. It’s part of our 1031 exchange guide.
What a qualified intermediary does
The regulations describe a qualified intermediary as a person who isn’t the taxpayer or a disqualified person, enters into a written exchange agreement with the taxpayer and, under that agreement, acquires the property you sell and transfers the property you buy. When those conditions are met, the intermediary isn’t treated as your agent, so its receipt of the money isn’t treated as yours.
In practice the intermediary doesn’t take title. The regulations let it be treated as acquiring and transferring property when your rights in the contracts are assigned to it and all parties get written notice of the assignment. A typical sequence looks like this:
- Before the sale closes: you sign the exchange agreement, and escrow receives the assignment of your sale contract to the intermediary with notice to the buyer.
- At the sale closing: escrow wires the net proceeds directly to the intermediary, not to you.
- By day 45: you deliver your signed identification of replacement property, usually to the intermediary; see our identification rules guide.
- At the purchase closing: your purchase contract is assigned to the intermediary, it wires the exchange funds to the replacement escrow, and title goes to you.
- After the exchange: any money left over is released under the agreement’s terms and is taxable as boot.
The 45-day and 180-day clocks start when the sale closes, so use our 1031 deadline calculator and confirm the dates with the intermediary in writing.
The agreement must lock up the money
The safe harbor works only if the exchange agreement expressly limits your rights to receive, pledge, borrow or otherwise get the benefit of the money the intermediary holds. Under paragraph (g)(6), the agreement must say you have no rights to the money before the end of the exchange period, with only these exceptions:
- If you identify no replacement property by day 45, the agreement may release the money after the identification period ends.
- If you did identify property, the money may be released once you’ve received everything you’re entitled to under the agreement.
- It may also be released on a material and substantial contingency that arises after the identification period, is written into the agreement and is beyond your control and the control of any disqualified person other than the buyer.
Read that part of the agreement closely. A clause that lets you take the money “at any time on request” can cost you the safe harbor even if you never ask, because the protection ends once you have an immediate or unrestricted right to the funds.
Who can’t be your intermediary
A disqualified person can’t serve. An IRS information letter (INFO 2004-0230) summarizes the rule from paragraph (k) of the regulation:
| Disqualified | Not disqualified by that alone |
|---|---|
| Anyone acting as your agent at the time of the transaction | Someone whose only services to you were for 1031 exchanges |
| Your employee, attorney, accountant, investment banker or broker, or real estate agent or broker, at any time in the two years ending on the date you transfer the first relinquished property | A financial institution, title insurance company or escrow company providing routine financial, title insurance, escrow or trust services |
| People related to you, or related to your agent |
That means the broker selling your property, including Diamond, can’t be your intermediary, and neither can your regular CPA or business attorney. It also rules out an informal arrangement where a friend, relative or the escrow officer simply holds the money for you outside a proper exchange agreement.
What California law requires of exchange facilitators
California regulates intermediaries as “exchange facilitators” in Division 20.5 of the Financial Code. The law covers anyone who, for a fee, acts as a qualified intermediary for the sale of California property, as an exchange accommodation titleholder holding California property, or as a qualified trustee or escrow holder, along with anyone who keeps a California office or solicits the California public for this business.
| Requirement | What the statute says | Section |
|---|---|---|
| Security for client funds (one or more) | A fidelity bond of at least $1,000,000; or a deposit of at least $1,000,000 in cash, securities or irrevocable letters of credit; or all exchange funds kept in a qualified escrow account or qualified trust at a financial institution, with withdrawals requiring both the facilitator’s and the client’s written authorization | 51003 |
| Errors and omissions | E&O insurance of at least $250,000, or a $250,000 deposit | 51007 |
| Handling the money | Act as custodian of exchange funds and invest them under a prudent investor standard aimed at liquidity and preserving principal; knowingly commingling them with operating accounts, or lending them to affiliates, violates that standard | 51009 |
| Protection from the facilitator’s creditors | Exchange funds aren’t subject to execution or attachment on claims against the facilitator | 51009 |
| Change of ownership | Clients must be notified within 10 business days after a transfer of more than 50% of the facilitator’s assets or ownership, and the notice posted online for at least 90 days | 51001 |
| Prohibited conduct and remedies | No material misrepresentations, failing to account for funds or failing to deliver funds owed; a person damaged can claim against the bond or deposit, and violators are subject to civil suit | 51011, 51005, 51013 |
Some parties are excluded, including banks acting only as depositories and title or escrow companies acting solely as qualified escrow holders or trustees. A bond is a floor, not a guarantee: on a large exchange, $1,000,000 may cover only part of your money, which is why the account structure matters as much as the bond.
When intermediaries fail
The risk isn’t theoretical. Iowa State University’s Center for Agricultural Law and Taxation describes the bankruptcy of LandAmerica 1031 Exchange Services, which held roughly $420 million for about 450 customers. The court found the funds weren’t held in trust or escrow, so the exchangers were general unsecured creditors, paid only pro rata after secured creditors.
The details matter for anyone choosing an intermediary now. The agreement never used the words “trust” or “escrow,” it gave the intermediary “sole & exclusive possession, dominion, control and use” of the funds, exchange money was commingled with operating funds, and some of it was in auction-rate securities that became hard to value.
The IRS responded with Revenue Procedure 2010-14, a safe harbor for exchangers whose exchange failed because the intermediary entered bankruptcy or receivership. If you meet its conditions, including timely identification and no actual or constructive receipt of the money beforehand, you recognize gain only as you’re actually paid, rather than all at once. That helps with timing; it doesn’t get your money back.
Questions to ask before you sign
- Where will my money sit? Ask whether funds go to a segregated account in your name or a qualified escrow or qualified trust account, and whether withdrawals need your written authorization.
- What security backs it? Ask for proof of the fidelity bond or deposit under Financial Code 51003 and the E&O coverage under 51007, with the amounts and the insurer.
- How are funds invested, and who earns the interest? The agreement should say.
- What are all the fees? Get a written quote covering the exchange fee, any per-property or wire charges, and fees for reverse or improvement exchanges.
- Does the agreement meet (g)(6)? Have your CPA or attorney confirm the release terms before you sign.
- Who will I work with? Ask how identification notices are received and confirmed, and who coordinates with escrow on both closings.
- Does it handle California filings? On a California sale the intermediary can have state withholding and notice duties; see below.
If your plan involves buying before you sell, or building on the replacement property, ask whether the firm also serves as an exchange accommodation titleholder. California’s law covers that role too; our guides to reverse exchanges and improvement exchanges explain the structures. Diamond may refer you to partners we work with; you’re free to choose any provider.
California withholding and the intermediary
Revenue and Taxation Code 18662 treats an intermediary in a deferred exchange as a withholding agent. If the exchange fails the identification or completion requirements, the intermediary must notify the Franchise Tax Board in writing within 10 days after the deadlines pass and remit withholding from the money it still holds. As our main 1031 exchange guide explains, a failed exchange triggers withholding of 3 1/3% of the sales price or an elected amount based on the gain, and the intermediary also withholds if you receive more than $1,500 in cash or other boot. Our Form 593 withholding guide covers the forms, and our guide to boot and partial exchanges explains what happens to money left over.
If your replacement property is outside California, the state’s annual FTB 3840 filing follows the exchange; see our California clawback guide.
Questions people ask
What is a qualified intermediary in a 1031 exchange?
An independent party that signs a written exchange agreement with you, takes an assignment of your sale and purchase contracts, and holds the proceeds so you don’t receive them. It can’t be you or a disqualified person.
Can my real estate agent be my qualified intermediary?
No. Anyone who acted as your real estate agent or broker in the two years before your first sale closes is a disqualified person, and so is your attorney, accountant or employee in that period.
Can my escrow or title company hold my exchange funds?
Routine escrow and title services don’t disqualify a company. Escrow can also hold funds in a qualified escrow account if the agreement meets the regulations, but don’t let escrow send the proceeds to you, even briefly.
Are qualified intermediaries regulated in California?
Yes. Financial Code 51000 to 51013 requires a $1,000,000 bond or deposit, or a qualified escrow or trust account, plus $250,000 of errors and omissions coverage, prudent handling of funds and notice to clients after a change in control.
When do I need to hire a qualified intermediary?
Before your sale closes. Once the proceeds reach you, it’s too late to start a deferred exchange with that money.
What happens if my qualified intermediary goes bankrupt?
Your money can be tied up with other creditors, as LandAmerica’s customers found. Revenue Procedure 2010-14 lets qualifying exchangers report gain only as they’re paid, but it doesn’t restore the funds.
How much does a qualified intermediary charge?
Fees vary by firm and by the type of exchange, so get a written quote that lists every charge and says who keeps the interest on your funds.
We handle the real estate side of exchanges for investors selling and buying across Northern California, including rental property sales and vineyard and ranch land exchanges, and we coordinate timelines with your intermediary and CPA. Talk with us about your exchange before you list. This is general information, not legal or tax advice; talk to a CPA or tax attorney about your situation.
Sources & notes
- Cornell LII: 26 CFR 1.1031(k)-1, treatment of deferred exchanges (paragraphs (g)(3), (g)(4), (g)(6))
- IRS: Information Letter INFO 2004-0230 (qualified intermediary qualifications; disqualified persons)
- California Legislature (via California Public Law): Financial Code section 51000
- California Legislature (via California Public Law): Financial Code section 51001
- California Legislature (via California Public Law): Financial Code section 51003
- California Legislature (via California Public Law): Financial Code section 51005
- California Legislature (via California Public Law): Financial Code section 51007
- California Legislature (via California Public Law): Financial Code section 51009
- California Legislature (via California Public Law): Financial Code section 51011
- California Legislature (via California Public Law): Financial Code section 51013
- California Legislature (via California Public Law): Revenue and Taxation Code section 18662
- Iowa State University CALT (Roger McEowen): The perils of a tax-deferred exchange when the qualified intermediary goes bankrupt
Last reviewed October 2026 by Matthew Martinez.
