1031 Qualified Intermediary: What the Law Requires, the 8 State Laws, and What Exchangers Lost When QIs Failed

What the regulation says a qualified intermediary is

Section 1031(a)(3) of the Internal Revenue Code allows a deferred exchange, and the regulation that runs it, Treas. Reg. 1.1031(k)-1, gives sellers several “safe harbors” so that the cash from the sale is not treated as received by them. The qualified intermediary is one of them, in paragraph (g)(4). The definition is short. A QI is a person who “(A) Is not the taxpayer or a disqualified person” and who enters into a written agreement with the taxpayer (the exchange agreement) and, as that agreement requires, acquires and transfers the property you sell and the property you buy. A QI does not have to take title: under (g)(4)(iv) and (v), it is enough that your sale and purchase contracts are assigned to it and “all parties to that agreement are notified in writing of the assignment on or before the date of the relevent transfer” (the regulation’s own spelling).

What the safe harbor buys you is in (g)(4)(i): the QI “is not considered the agent of the taxpayer” for deciding whether you received the money. That only works if the exchange agreement “expressly limits the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money” held by the QI, in the way paragraph (g)(6) sets out. In practice that means the agreement must lock the cash up until one of three things happens:

• You identify nothing by day 45. Then the agreement may release the money “at any time after the end of the identification period” (1.1031(k)-1(g)(6)(ii)).
• You receive all the replacement property the agreement entitles you to (1.1031(k)-1(g)(6)(iii)(A)).
• A material contingency after day 45 that relates to the exchange, is written into the agreement and is outside your control (1.1031(k)-1(g)(6)(iii)(B)).

Two consequences follow, and both matter when a QI gets into trouble. First, you cannot simply ask for your money back during the exchange; a QI that hands it over on request breaks the safe harbor. Second, the regulation itself says that “Rights conferred upon the taxpayer under state law to terminate or dismiss the qualified intermediary are disregarded for this purpose” (1.1031(k)-1(g)(4)(vi)): firing the QI does not by itself give you the cash.

The QI is not the only route. Paragraph (g)(3) allows the buyer’s obligation to be secured by cash “held in a qualified escrow account or in a qualified trust”, with an escrow holder or trustee who is not you or a disqualified person and an agreement with the same (g)(6) limits. This is analysis of public documents and the law, not tax, legal or investment advice.

Who cannot be your QI: the disqualified person rule

Paragraph (k) of the regulation lists three kinds of disqualified person.

1. Your agent. Under 1.1031(k)-1(k)(2), a person “who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker” within the 2-year period ending on the date you transfer the first relinquished property is treated as your agent. Two kinds of work do not count: services on earlier section 1031 exchanges, and “Routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company”.
2. A related person. Anyone with a relationship to you under sections 267(b) or 707(b), read with “10 percent” in place of 50 percent (1.1031(k)-1(k)(3)).
3. A person related to your agent, on the same 10% test (1.1031(k)-1(k)(4)(i)). For transfers on or after January 17, 2001, a bank or bank-owned exchange subsidiary is not disqualified merely because a member of its group gave you investment banking or brokerage services (1.1031(k)-1(k)(4)(ii)).

The regulation’s examples make the line concrete. In its Example 1, “C is a disqualified person because C has acted as B’s accountant within the 2-year period.” In Example 2, an exchange company owned by an escrow company that had done routine escrow work for the seller is not disqualified. In Example 3, a QI owned 10% each by ten law firms is not disqualified even though one of those firms advised the seller, because no disqualified person owns more than 10% of it.

No federal license: the eight state laws we verified

Nothing in section 1031 or its regulations licenses, bonds or audits a QI, and the state laws that exist say so. Washington’s statute opens with the finding that “there are no statutory requirements pertaining to persons who facilitate like-kind exchanges” (RCW 19.310.005), and it forces every exchange facilitator to print a disclosure on its website and contract that ends: “Exchange facilitation services are not regulated by any agency of the state of Washington or of the United States government. It is your responsibility to determine that your exchange funds will be held in a safe manner.” (RCW 19.310.040(1)(b)).

We read the current text of every state exchange-facilitator statute we could find and retrieve from an official or official-derived source. Eight qualify. They share a template: a minimum fidelity bond (insurance against the QI’s own dishonesty) or an alternative, errors and omissions insurance, a duty to keep the money liquid and not commingle it with the QI’s operating accounts, a ban on lending it to affiliates, and a change-of-control notice. They differ on the two things that matter most to a seller: whether anyone licenses the QI, and whether your money has to sit in an account that needs your signature to move.

Three things the table does not show. Where each law applies: the definitions reach a QI handling relinquished property located in that state, and most also reach a QI that keeps an office there (California and Maine add advertising aimed at the state). Nevada’s chapter expressly excludes a QI that “holds exchange funds received from the disposition of relinquished property located outside this State” (NRS 645G.040(3)(d)). Bank exemptions: most of the statutes exempt a financial institution acting only as a depository or as a qualified escrow holder or trustee, and Maine exempts financial institutions outright (10 M.R.S. 1396(5)(B)). Idaho: industry material lists Idaho as regulating QIs through its escrow law, but we could not retrieve Idaho’s statute or regulator guidance from an official source for this page, so Idaho is not in the table.

The bond is the number to keep in proportion. The statutes set the bond as one total amount for the QI, not an amount per client (our reading), and Nevada’s statute says claims against a bond or deposit “have equal priority” and are paid “on a pro rata basis” if it is not enough (NRS 645G.320(7)). For a single $1.5 million sale, the bond alone could not make you whole even if you were the only claimant (our arithmetic).

When a QI fails: LandAmerica 1031 Exchange Services (2008)

LandAmerica Financial Group was a title insurance group listed on the New York Stock Exchange, and LandAmerica 1031 Exchange Services (LES) was its wholly owned exchange subsidiary. Its SEC filings show how a QI with no fraud at all still lost access to customer money.

The 10-Q for the quarter to September 30, 2008 explains the setup. The exchange funds were “not included as our assets” on the balance sheet, but “our 1031 exchange company remains obligated for the return and availability of proceeds.” The funds “totaled $400.7 million at September 30, 2008 and $863.2 million at December 31, 2007.” They were held either “in a commingled account ($290.5 million at September 30, 2008)” or, if the customer asked, “in a separate account designated by the taxpayer ($110.2 million at September 30, 2008).” And “Approximately $290.5 million of such funds were invested in auction rate securities”, which had stopped trading in early 2008. LandAmerica recorded a $60.5 million contingent obligation for the gap between their market value and par, and the parent had already put in about $20.0 million before September 30 and $45.0 million after it to close customers’ exchanges.

The customer letter, filed as an exhibit, gives the QI’s own explanation: “Although the total par value of our 1031 exchange funds exceeds the value of all funds received from our customers, portions of the 1031 funds are invested in illiquid auction rate securities. Our inability to sell or borrow against these securities has precipitated our decision to terminate operations.”

The bankruptcy record is the part every seller should read. The disclosure statement says that about 50 of the roughly 450 exchange agreements required LES to keep the money “in segregated accounts or sub-accounts that were associated with the applicable Exchange Customer’s name or taxpayer identification number”, and the rest had “no escrow or segregation requirement.” Customers in both groups sued to get their funds out of the estate, arguing the money was held in trust. On April 15, 2009 the court held that a segregated customer’s “Exchange Funds constitute property of LES’ estate”, and on May 7, 2009 it held the same for the commingled customers, rejecting the express and resulting trust arguments (it reserved the constructive-trust question). The only class the proposed plan paid at a fixed rate was the one whose money sat with a separate escrow holder: “ninety-seven percent (97%)” of allowed escrow-exchange claims. The plan offered segregated and commingled customers cash plus pro rata interests in liquidating trusts, and the disclosure statement gave no fixed recovery percentage for them; we did not find the final payout in the SEC record, because LandAmerica stopped filing after the plan.

What this case does and does not show: a separate account in the QI’s name did not keep the money out of the QI’s bankruptcy in this court, on these agreements. A qualified escrow or trust with an independent holder, of the kind (g)(3) describes and several state laws offer as an alternative to the bond, was treated as a different class. Whether a given account survives a QI bankruptcy depends on the agreement and the court; this is not legal advice.

When a QI is a fraud: the 1031 Tax Group and Vesta Strategies

LandAmerica failed on an investment. The two other collapses with federal court records failed because the owners took the money.

The 1031 Tax Group. According to the U.S. Attorney for the Eastern District of Virginia, owner Edward H. Okun was convicted by a jury on March 19, 2009 and sentenced on August 4, 2009 “to 100 years in prison”, a sentence the Fourth Circuit upheld in November 2011; the fraud “led to the loss of more than $126 million in client funds.” The evidence at trial was that from August 2005 through April 2007 client money was used for the owner’s lifestyle, the operating costs of his other companies, commercial real estate, and to “purchase additional qualified intermediary companies to obtain access to additional client funds.” In that scheme, buying an established QI was the way to reach its clients’ deposits. The group’s former chief operating officer admitted in her plea that “approximately $132 million” was misappropriated and was sentenced to 10 years.

Vesta Strategies (San Jose, California). The U.S. Attorney for the Northern District of California says Vesta, “a qualified intermediary”, “collapsed in July of 2008 with approximately $25 million owed to its Section 1031 depositors”, because its owners and managers took the money and because new deposits were used to pay earlier depositors “in a Ponzi-like manner” (allegations in the indictment, to which the owners pleaded guilty). The majority owner was sentenced to 84 months in September 2012 and the chief executive to 66 months in November 2012.

The three cases are the ones we could document from court or SEC records; they are not a count of every QI failure. Two of them happened in 2008, before most of the state statutes above were passed (California’s took effect January 1, 2009; Washington’s and Maine’s were enacted in 2009, Virginia’s in 2010, and Oregon’s and Connecticut’s in 2013).

If your QI fails: the IRS safe harbor, and its limits

The IRS’s starting point is in Publication 544: if a QI cannot meet its obligations, “your transaction may not qualify as a tax-free deferred exchange. In that case, any gain may be taxable in the current year.” After the 2008 failures the IRS issued Rev. Proc. 2010-14, a safe harbor for sellers whose QI defaulted and entered bankruptcy or receivership. If you qualify, you report the gain only as you actually get money back, using a gross profit ratio, and payments from “the bankruptcy or receivership estate of the QI, the QI’s insurer or bonding company, or any other person” all count.

The conditions are narrow (Rev. Proc. 2010-14, section 3): you must have transferred the property to the QI under 1.1031(k)-1(g)(4); you must have “Properly identified replacement property within the identification period (unless the QI default occurs during that period)”; the exchange must have failed solely because of the QI default; and you must not have had actual or constructive receipt of the proceeds before the proceeding began. A QI owner who disappears with the money without a bankruptcy or receivership filing is not covered by its terms. How it applies to your sale is a question for your tax adviser.

Fees and interest: what the regulations say, and what we could not find

We looked for QI fees in filings and published fee schedules we could save from a primary source and found none we could cite, so this page gives no fee figures. What the regulations do settle is how the fee and the interest are treated, which tells you what to ask.

• Interest is either yours or the QI’s, by contract. Under Treas. Reg. 1.468B-6(c)(1), exchange funds are by default “treated as loaned from a taxpayer to an exchange facilitator”, and the QI is taxed on the earnings. If the agreement pays “all the earnings attributable to a taxpayer’s exchange funds” to you, you are taxed on them instead (1.468B-6(c)(2)). Money in “an account established under the taxpayer’s name and taxpayer identification number with a depository institution” (a separately identified account) makes it simple to show which earnings are yours.
• A QI that keeps the interest is, in tax terms, borrowing your money. Below-market loan rules can apply, but an exchange facilitator loan is exempt when the funds “treated as loaned does not exceed $2,000,000 and the duration of the loan is 6 months or less” (Treas. Reg. 1.7872-5(b)(16)).
• Fix the fee in writing before closing. The QI’s fee is treated as a transactional expense only if the agreement fixes it on or before the transfer of the relinquished property and makes it payable “regardless of whether the earnings attributable to the exchange funds are sufficient to pay the fee” (1.468B-6(b)(4)(ii)).

What to ask a QI before you sign, and why

Each question is tied to the rule or the case behind it.

What a seller can do with this

• Pick the QI before closing, so the contract can be assigned to it with written notice to the buyer on or before closing, as 1.1031(k)-1(g)(4)(v) requires. The timing rules that start that day are in our 1031 exchange timeline for a late-2026 sale.
• Rule out your own advisers first. If your CPA, lawyer or broker did ordinary work for you in the last two years, their firm cannot hold your exchange funds; a title or escrow company that only did routine closings for you can.
• Look up your state’s law, then ask for the paper. In Nevada and Maine, check the license. Everywhere, ask for the bond and E&O certificates and the account statement in your name, and read the withdrawal clause.
• Prefer an account that needs your signature to move money, or a qualified escrow or trust with an independent holder. In the LandAmerica case, the customers whose money sat with a separate escrow holder were the only class with a fixed 97% recovery in the proposed plan.
• Ask what the cash is invested in, in writing. “Investment Grade Securities Rated A or stronger” did not protect LandAmerica’s customers; liquidity did not exist when they needed it.
• If you are buying a DST as replacement property, the QI sends the money straight to the sponsor; what the DST itself charges is in our analysis of 2026 DST Form D filings.

FAQ

Sources, read and saved on October 7, 2026: 26 CFR 1.1031(k)-1, 1.468B-6, 1.7872-5 and 1.7872-16 as published on the eCFR (text as of September 30, 2026); IRS Publication 544 (2025) and Rev. Proc. 2010-14 (Internal Revenue Bulletin 2010-12); California Financial Code sections 51000-51013 (leginfo.legislature.ca.gov); C.R.S. 6-1-721 (text of the 2024 Colorado Revised Statutes as reproduced by colorado.public.law); Connecticut General Statutes 36a-830 to 36a-836 and Public Act 13-135 (cga.ct.gov); 10 M.R.S. 1395-1400 (legislature.maine.gov); NRS chapter 645G (leg.state.nv.us, via the Internet Archive copy of July 11, 2026, because the site blocks automated access); ORS 673.800-673.825 (as reproduced by oregon.public.law from oregonlegislature.gov); Code of Virginia 55.1-800 to 55.1-806 (law.lis.virginia.gov); RCW 19.310 (app.leg.wa.gov); LandAmerica Financial Group filings on SEC EDGAR (Form 10-Q, accession 0001002105-08-000361; Forms 8-K 0001002105-08-000407, 0000877355-08-000040 with Exhibit 99.2, 0001002105-09-000409 with the Exhibit 99.1 disclosure statement, and 0001002105-09-000535); and U.S. Department of Justice releases of the Eastern District of Virginia (November 17, 2011), the Office of Public Affairs (2009) and the Northern District of California (September 28 and November 16, 2012). Customer names in the bankruptcy record are omitted. Sums and comparisons are our arithmetic or our reading. This is analysis of public documents and the law, not tax, legal or investment advice.