1031exchange rules prohibit the Exchanger from taking constructive receipt of the proceeds from the sale of a relinquished property. A Qualified intermediary (QI) or Accommodator acts as a fiduciary over the proceeds from the sale of the relinquished property during the exchange period, and helps the Exchanger comply with applicable IRS exchange requirements.

Disinterested 3rd Party
A QI must be a disinterested third-party to the exchange transaction. Any advisor of the Exchanger, such as Accountant, Real Estate Agent or Attorney, who has had an agency relationship with the Exchanger over the preceding 24 months, is disqualified from acting as a Qualified Intermediary.

Trust Account
The sale proceeds from the relinquished property are deposited into a bank account administered by the QI. In many instances, the Exchanger will earn interest on the funds deposited with the QI. The exchange funds will be paid directly out of the exchange account for the purchase of the replacement property. The Exchanger does not have access to the exchange funds unless the exchange has expired or failed. When selecting a QI, make sure there is adequate fidelity bond insurance (theft insurance), errors and omissions insurance (mistake insurance), and that funds are held in a bankruptcy remote fiduciary account. QI's are not required to carry insurance covering exchange accounts, but most reputable QI's do.

Compliance with IRS Laws
Whether the exchanger is involved in a forward exchange, or a more complicated reverse exchange, there are many steps in the exchange process that cannot be overlooked or omitted. The Internal Revenue Code Section 1031 and the regulations contain many rules with applicable deadlines. A knowledgeable QI will explain the rules, and keep you in compliance with the law.

Federation of Exchange Accommodators
In 1990 the IRS issued Section 1031 Safe Harbor Regulations that defined the rules of conducting business as a QI. Shortly after, leading QI’s established the Federation of Exchange Accommodators (FEA) to provide regulation over its members and further its involvement in legislative matters and industry education. The FEA also established a Certified Exchange Specialist (CES) designation. CES designees must complete substantial requirements and demonstrate competence in the industry. All FEA members must also comply with their code of ethics.

Fees
QI's typically charge a flat fee of approximately $750 for a forward exchange involving one relinquished property and one replacement property. There is usually an additional charge for multiple property exchanges. More complicated exchanges, such as a reverse exchange, can be considerably more expensive.