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A Qualified Intermediary holds and manages exchange funds during the exchange period under IRS regulations. A Qualified Intermediary (QI) is also known as an Accommodator, Facilitator, or Intermediary. All of these terms are used in the exchange industry today. In 1991, new IRS regulations established "Safe Harbor" guidelines for the Qualified Intermediary role, which played a huge part in the growth of the QI as a profession.
Someone who has a previous (non-QI) relationship with the exchanger cannot serve as their QI in an exchange. This is because the taxpayer could be deemed to have "constructive receipt" of the exchange proceeds, which means they have control over their money through their agent. Agents of the exchanger cannot qualify as their QI. Agents include the taxpayer's Real estate agent, Real Estate Agent's broker, CPA, Attorney, etc.
Choosing a Qualified Intermediary
The qualified intermediary industry is relatively new and unregulated. Most Qualified Intermediaries are trustworthy, and many (but not all) have joined the Federation of Exchange Accommodators (FEA). The FEA was formed as a self-regulating professional association to maintain industry standards. However, service and expertise can vary widely, so it is always wise for taxpayers to carefully choose any company that will represent their interests. Here are a few guidelines to help you:
Members of a Profession
The QI industry is unregulated. Accordingly, choosing a QI that is subject to a regulating board of another profession (Such as a CPA or Attorney) can provide peace of mind.
 Questions to Ask Your QI:
Are you licensed as a Certified Public Accountant or licensed with the State Bar?
Familiarity with Tax Laws
Although Section 1031 itself is short, the regulation of the law has produced a complex number of court cases, revenue rulings, and private letter rulings, making it one of the more complex parts of the tax code.
Questions to Ask Your QI:
Have you read IRC Section 1031?
Are you familiar with the Internal Revenue Code, US Treasury Regulations, IRS Rulings and Court Cases?
Experience with IRS auditors
1031 exchanges are one of the best tax strategies out there. However, as with any tax strategy, the key is the interpretation of the law and the ability to defend the position. The QI should understand the different interpretations and related risks of different strategies and techniques and be prepared to help the taxpayer defend their position in case of an audit.
Questions to Ask Your QI:
Has the QI represented exchangers to IRS auditors and IRS appeals officers?
Do they know the red flags the IRS looks for in an audit?
Does the QI care how the transaction looks on closing statements?
Knowledge and Creativity
Some QI's just complete the exchange paperwork, and many handle only "basic" exchanges. Some QI's refuse to give you any advice, recommending instead that you ask questions of your tax advisor. However, most tax advisors only see a very small number of exchange transactions, and often are unable to answer your questions.
Questions to Ask Your QI:
Do you offer advice?
Do you suggest ideas and look for creative approaches to exchange situations?
Bonding
When the QI industry boomed in 1991, obtaining bonding insurance for the new profession was difficult. Summit joined other FEA 1031 in pushing to get approved for bonding insurance, and as a result, was one of the first 10 QI's to receive it.
Questions to Ask Your QI:
Are you covered by a multi-million dollar bonding policy?
Coverage for Errors and Omissions
Like Bonding Insurance, insurance coverage to protect the client against the possibility of mistakes is a must in any field where someone is preparing important documents for you.
Questions to Ask Your QI:
Does the QI have adequate malpractice insurance coverage in case negligence in structuring the exchange results in payment of tax?
Service
It would seem that this is an unnecessary criteria to put in our list. However, quality service is a rarity these days and often gets overlooked. A good qualified intermediary will be focused on the customers needs and would even discourage a customer from an exchange if that isn't the best solution for their specific situation.
Questions to Ask Your QI:
Does the QI respond quickly and give knowledgeable responses to your questions?
Do they have a good reputation and testimonials from satisfied customers?
Longevity
Because the QI industry has grown rapidly, many of the companies offering these services have not been around for long. Summit is one of the oldest QI's, having started in 1991 after the safe harbor procedures for QI's was first established.
Questions to Ask Your QI:
How long has the QI been in the business of facilitating exchanges?
How many exchanges has the QI completed?
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