QI Contract Checklist: How to Secure Your 1031 Exchange Funds
When you sell an investment property through a 1031 like-kind exchange, the entire net equity from that sale sits in someone else's hands for up to 180 days. That someone is your Qualified Intermediary. The document governing how those funds are held, moved, and protected is the Exchange Agreement. Because 1031 intermediaries are largely unregulated at the federal level, the burden of due diligence falls entirely on you, the investor. This guide walks you through every clause, safeguard, and red flag you should evaluate before signing a QI contract.
What Is an Exchange Agreement?
An Exchange Agreement is the contract between a 1031 investor and a Qualified Intermediary that governs how exchange funds are transferred and held. It should spell out exactly how proceeds move from escrow to the QI account and back out to the replacement property closing. Without this document executed before closing, the IRS treats the transaction as a taxable sale rather than an exchange.
A Qualified Intermediary (QI) is a third-party facilitator required by the IRS to hold sale proceeds and acquire replacement property on behalf of the investor, ensuring the taxpayer never takes constructive receipt of the funds. Under Treasury Regulation §1.1031(k)-1(g)(4), the QI must limit your ability to access or control exchange funds during the exchange period.
Segregated, FDIC-Insured Accounts
The single most important fund-security clause in any QI contract addresses where your money is held. Your contract should require the intermediary to deposit proceeds in a segregated account at a highly rated financial institution, identified with your taxpayer identification number. Funds should never be commingled with the QI's operating funds or the accounts of other clients.
At Granite Exchange Services, we hold funds in FDIC-insured segregated accounts and provide written confirmation of deposit so you can independently verify placement. Look for this language explicitly in any Exchange Agreement you review.
What "Segregated" Really Means
A segregated account is a bank account established solely for your exchange proceeds, labeled with your name or tax ID. This is different from a pooled or omnibus account where multiple clients' funds are held together. Segregation protects your funds if the QI faces financial trouble, because the money is legally distinguishable from the company's assets.
Dual-Signoff and Disbursement Controls
Your Exchange Agreement should specify exactly who can authorize movement of funds. The strongest protection is a dual-signoff requirement, meaning both you and the QI must authorize any wire transfer or disbursement. This prevents unauthorized movement of your equity and adds a critical layer of fraud protection.
The contract should also state that funds may only be disbursed to the title or escrow company coordinating your replacement property closing, or back to you once the exchange period expires. Any clause that gives the QI unilateral authority to invest, lend, or redirect your funds is a serious warning sign.
Fidelity Bonds and E&O Insurance
A fidelity bond is a form of insurance that protects clients against losses caused by criminal acts of the exchange facilitator, such as theft or fraud. Errors and omissions (E&O) insurance covers losses resulting from professional mistakes or negligence. Your QI contract should disclose both coverages and their dollar limits.
| Protection Type | What It Covers | What to Look For |
|---|---|---|
| Fidelity Bond | Theft, fraud, or criminal acts by QI staff | Minimum $1 million; some states (e.g., Washington) require it by law |
| E&O Insurance | Professional errors, missed deadlines, documentation mistakes | Coverage limits sufficient for your exchange value |
| Segregated Accounts | Protects funds from QI insolvency or creditor claims | Account in your TIN at an FDIC-insured bank |
| Dual-Signoff | Prevents unauthorized fund disbursement | Explicit clause requiring both parties to authorize transfers |
Granite Exchange Services is licensed and bonded, and our team is CES® certified with over 20,000 completed exchanges since 2000. Always request written proof of bonding and insurance before signing.
Fee Transparency and Hidden Costs
A trustworthy Exchange Agreement clearly details every fee you will pay. Typical QI fees for a standard delayed exchange range from $750 to $2,500. Reverse exchanges generally cost $3,000 to $7,500 due to their added complexity. Watch for hidden charges such as wire fees, cancellation fees, or interest-sharing arrangements on held funds.
Interest on Held Funds
Your contract should state whether your exchange account is interest-bearing and who receives the interest. Some QIs retain all earned interest as additional compensation. Others credit it to you. Ask for this in writing before you sign.
Deadline Tracking and IRS Compliance Language
Every 1031 exchange must comply with two strict IRS deadlines: you have 45 days to identify potential replacement properties and 180 days to close. Your Exchange Agreement should confirm these deadlines in writing and describe how the QI will notify you as they approach.
The agreement should also outline the QI's responsibility to prepare all required exchange documentation, including the Assignment of Purchase and Sale Agreements and Notices of Assignment. A well-drafted contract removes ambiguity about who handles what.
Red Flags That Should Stop You from Signing
Not all intermediaries offer the same level of security or expertise. During the 2007 to 2009 recession, some investors lost their exchange funds when QIs misappropriated or poorly invested client money. More recently, at least one intermediary lost client funds by investing them in cryptocurrency. Here are warning signs to watch for:
- No mention of segregated accounts or FDIC insurance
- QI retains unilateral authority over fund disbursement
- No disclosure of fidelity bond or E&O insurance
- Vague or missing fee schedule
- No written confirmation of deposit or independent verification method
- The QI has served as your attorney, accountant, or real estate agent within the past two years (this is a disqualifying relationship under IRS rules)
Key Takeaways
- The Exchange Agreement is the governing contract between you and your QI. Read every clause before signing.
- Demand segregated, FDIC-insured accounts identified with your taxpayer ID number.
- Insist on dual-signoff requirements for all fund disbursements.
- Verify fidelity bond coverage and E&O insurance limits in writing.
- Ensure the contract explicitly states all fees, interest policies, and cancellation terms.
- Confirm the agreement includes accurate 45-day and 180-day deadline language.
- Walk away from any QI that cannot provide transparent proof of fund security measures.
Frequently Asked Questions
What is a Qualified Intermediary contract called?
The contract is typically called an Exchange Agreement. It governs how your 1031 exchange funds are held, transferred, and protected throughout the exchange period. It must be executed before closing on your relinquished property.
Are Qualified Intermediaries regulated by the federal government?
No. QIs are not regulated at the federal level, and most states have no licensing requirements either. A few states, such as Washington and Nevada, have enacted legislation requiring fidelity bonds and segregated accounts.
How do I verify my exchange funds are in a segregated account?
Your Exchange Agreement should include written directions for independently verifying the deposit. You can also request a bank statement or letter from the depository institution confirming the account is in your name or TIN.
What happens to my funds if my QI goes bankrupt?
If funds are held in a properly segregated account in your TIN, they are legally distinguishable from the QI's corporate assets and should be protected from creditor claims. Commingled funds carry far greater risk.
Should my QI contract include a dual-signoff clause?
Yes. A dual-signoff clause requires both you and the QI to authorize any fund disbursement. This provides the highest level of protection against unauthorized transfers.
What fees should I expect in a QI contract?
Standard delayed exchange fees typically range from $750 to $2,500. Reverse exchanges and improvement exchanges cost more, often $3,000 to $7,500, due to added complexity and risk.
Can my real estate agent serve as my Qualified Intermediary?
No. IRS Treasury Regulations disqualify any person who has acted as your employee, attorney, accountant, real estate agent, or broker within the two years preceding the exchange.
How far in advance should I engage a QI?
Ideally, one to two weeks before closing on your relinquished property. This gives your QI time to prepare exchange documents and coordinate with the closing agent. Last-minute setups increase the risk of errors or delayed closings.
Start Your Exchange with Confidence
Your exchange funds deserve the highest level of protection. With 25+ years of experience and over 20,000 completed exchanges, Granite Exchange Services provides FDIC-insured segregated accounts, CES® certified counselors, and transparent Exchange Agreements. Call 800-899-6959 today to review your QI contract needs and start your exchange with a team that puts fund security first.