Your QI holds your money. Choosing the wrong one can cost you everything.
Your Qualified Intermediary holds 100% of your exchange proceeds from the moment you sell your relinquished property until you close on the replacement. During that period (up to 180 days), those funds are entirely in their custody.
The federal government does not license or regulate QIs. Most states don't either. That means it's entirely up to you to vet them.
In 2008, LandAmerica Financial Group, one of the largest QI providers in the country, went bankrupt and commingled exchange funds with company assets. Thousands of investors lost hundreds of millions of dollars in exchange funds. Many lost their entire deferred gain because the exchange failed and taxes came due, on money they no longer had.
This wasn't a small operator. It was one of the biggest names in the business. The lesson: size and reputation are not sufficient protection.
Segregated accounts. Your funds must be held in a separate, segregated account in your name, never commingled with the QI's operating funds or other clients' funds. Ask specifically: "Are my funds held in a segregated account?"
Fidelity bond and E&O insurance. Ask for proof of both a fidelity bond (protects against theft and fraud) and errors & omissions (E&O) insurance. Get the coverage amounts and carrier names.
Experience. How many exchanges have they completed? How long have they been in business? You want a QI with a long track record, not someone who started last year.
FDIC protection. Funds held at FDIC-insured institutions are protected up to $250,000 per depositor. For large exchanges, ask how they structure accounts to maximize FDIC coverage.
State regulation compliance. A few states (including California, Nevada, and Washington) have enacted QI regulations. If your property is in one of these states, verify the QI is compliant.
1. Where exactly will my funds be held? What bank?
2. Are my funds in a separate account or commingled?
3. What is your fidelity bond coverage amount?
4. Do you carry E&O insurance? What are the limits?
5. How many exchanges have you completed?
6. Who has signing authority over my exchange account?
7. How do I get my funds back if something goes wrong?
QI fees typically range from $750 to $2,500 for a standard forward exchange, depending on complexity and transaction size. Don't choose a QI based on price alone, a $500 savings isn't worth the risk when millions are at stake.
Your QI is the most important professional in your exchange. Do the due diligence. Ask the hard questions. The few hours spent vetting your QI properly is the best insurance you can buy.
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