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Guide · Starting a qualified intermediary

How to start aqualified intermediary.

A qualified intermediary holds a real estate investor's sale proceeds so they never receive them, then buys the replacement property on their behalf. The business is simple to describe and strict to run. Here is what it takes, in the order you'll meet it.
For title, banks and attorneys

1 · Who can serve

Start with who can't.

The regulations define the qualified intermediary as a person who isn’t the exchanger and isn’t a “disqualified person”: broadly, the exchanger’s agent within the two years before the transfer, such as their employee, attorney, accountant, investment banker, broker or real estate agent, or someone related to them. There are exceptions for routine financial, title and escrow services. That is why firms that already serve the investor usually run the intermediary as a separate, independent entity, and why the entity needs its own counsel-reviewed structure.

Treas. Reg. §1.1031(k)-1(g)(4) and (k). Have counsel confirm how the rule applies to your firm.

2 · The pieces

Five things to have in place before the first file.

  1. 01

    The entity

    A separate company organized to act as intermediary, with its own officers and signing authority.

  2. 02

    The exchange agreement

    Written by counsel, with the (g)(6) limits on the exchanger's rights to the money spelled out.

  3. 03

    Bond and insurance

    A fidelity bond and errors-and-omissions coverage, at the levels your states and your clients expect.

  4. 04

    The bank account

    A qualified escrow, qualified trust or segregated account structure for exchange funds.

  5. 05

    People and controls

    Exchange coordinators, at least two approvers, and a written wire-verification procedure.

3 · State law

Know the states that regulate intermediaries.

StateWhere to look
CaliforniaFinancial Code §§51000–51013
ColoradoC.R.S. §6-1-721
ConnecticutGen. Stat. §§36a-830 to 36a-836
IdahoIdaho Escrow Act, §30-901 et seq., as applied to intermediaries
Maine10 M.R.S. §§1395–1400
NevadaNRS chapter 645G
OregonORS 673.800–673.825
VirginiaCode §§55.1-800 to 55.1-806
WashingtonRCW 19.310
These statutes commonly address fidelity bonds or segregated funds, errors-and-omissions insurance, licensing or notice, and written authorization before exchange funds move. They change; read the current text with counsel, and check every state where your exchangers or properties are.

4 · Running files

The daily discipline.

  • Track day 45 and the end of the exchange period on every file, including the tax-return due date
  • Receive identification in writing, signed, by the end of day 45, and keep it
  • Never let funds reach the exchanger outside the (g)(6) release events
  • Verify every set of wire instructions by calling a number you found yourself
  • Require more than one person to approve every payout
  • Keep a record of every change, approval and payment that an auditor can follow

That list is the job description for exchange software. Regent does each of those things on every file, and the free deadline calculator and identification rule checker show the rules it applies.

5 · The industry

Join the people who do this.

The Federation of Exchange Accommodators is the national trade association for intermediaries. It publishes standards, runs an annual conference and offers the Certified Exchange Specialist designation. New firms gain a great deal from its members and materials.

Straight answers

Questions processors ask

Do I need a license to be a qualified intermediary?
There's no federal license. Several states regulate intermediaries, and a few require a license or registration. See the state table above and confirm with counsel.
Can my title company be the intermediary?
Title and escrow companies commonly form an affiliated intermediary. The routine title and escrow services exception matters here; have counsel structure it.
How do intermediaries earn money?
Typically an exchange fee per file, and in some arrangements a share of interest on held funds disclosed to the exchanger. Your agreement and your state's law govern both.
What software do I need?
Something that tracks both deadlines, records the money, controls payouts, generates and signs your documents and gives exchangers a portal. That’s Regent.

Keep going

Planning a 1031 business?

We'll walk through how Regent would run your first file, and what else you'll want lined up.

Your team has a direct line to ours.