How to Vet a Qualified Intermediary (QI)
To vet a Qualified Intermediary for a 1031 exchange, verify segregated exchange accounts, confirm fidelity bond and E&O insurance coverage, request the firm's financials, and ensure the QI is not a disqualified person under IRS rules.
Before you start
Your QI holds your sale proceeds between the downleg closing and upleg acquisition — sometimes for months. QI insolvency has happened. Picking a QI on price is the most common exchange mistake. Use this checklist.
What you need
- List of candidate QIs (ask your CPA, attorney, or broker for referrals)
- Sample exchange agreement from each
- Written Q&A responses
Steps
- Step 01
Confirm they are not a disqualified person
Under IRS rules, your attorney, CPA, real estate broker, or employee (or anyone who has served in those roles in the last two years) cannot act as your QI. Verify the firm's principals have no prior agency relationship with you.
- Step 02
Ask how exchange funds are held
The only acceptable answer is: 'In a segregated exchange account titled to your specific exchange, held at an FDIC-insured bank.' If funds are pooled with other exchangers, that's a red flag.
- Step 03
Verify fidelity bond and E&O insurance
Request written evidence of (a) a fidelity bond covering misappropriation and (b) errors-and-omissions insurance covering professional liability. Note the coverage amounts. For material exchanges, fidelity bond should exceed typical held-funds balance.
- Step 04
Request firm financial information
A reputable QI should provide at least summary balance sheet information or audited financials. If the firm refuses to share any financial information, move on.
- Step 05
Confirm exchange attorneys on staff
Ask whether exchange documents are reviewed by an attorney with 1031 specialization. Generic legal review is insufficient for complex exchanges (reverse, improvement, drop-and-swap).
- Step 06
Get the full fee schedule in writing
Base fee for a forward exchange, fee per identification, wire fees, extension fees, and any additional charges. Compare across candidates — but never pick on price alone.
- Step 07
Ask about parent company and years in business
How long has the firm been in business? Is it independently owned or part of a larger parent (title company, financial institution)? Parent backing can provide additional protection but also potential conflicts.
- Step 08
Confirm reverse and improvement exchange capability if needed
Not all QIs handle reverse or improvement exchanges. If you might need one, confirm the QI has Exchange Accommodation Titleholder (EAT) infrastructure and recent track record.
Common mistakes
- Picking the cheapest QI to save $500 when $500K is at risk
- Using your attorney or CPA's recommendation without independent vetting
- Engaging the QI only after the downleg goes under contract — start earlier
- Failing to verify segregated accounts vs. pooled funds
- Not getting insurance and bond coverage in writing
Frequently asked questions
Who regulates Qualified Intermediaries?
QIs are not federally licensed. Some states have regulatory regimes (notably California, Colorado, Oregon, Virginia, Washington), but most states do not. This is precisely why diligence matters — there is no regulator backstop.
How much does a QI cost?
A typical forward exchange runs $1,000-$2,500 for the QI service. Reverse and improvement exchanges run $10,000-$25,000 for the added EAT and legal complexity.
What happens if my QI goes bankrupt with my funds?
You become an unsecured creditor in the QI's bankruptcy, potentially losing substantial funds. This is why segregated accounts, bonding, and financial due diligence matter so much. A handful of QI failures over the last two decades have cost exchangers millions.