Many people considering a 1031 exchange ask “what is a qualified intermediary?” In the treasury regulations for deferred exchanges, the IRS and the congress have given us four different safe harbors for facilitating deferred exchanges and the qualified intermediary safe harbor is the one that’s most frequently used.
A Fancy Escrow Agent
A qualified intermediary is really a fancy escrow agent. It’s a neutral third party that typically prepares the 1031 documents and receives the proceeds from the relinquished property to insulate the seller from receiving the cash derived from the sale of the relinquished property.
The qualified intermediary that holds that cash and applies it for the purchase of the replacement property. So from the IRS’s perspective a seller of the relinquished property doesn’t receive the cash, they only receive the like kind replacement property that they designate and purchase within their hundred and eighty day exchange.
A Third Party Unbeholden to the Taxpayer
The idea with a qualified intermediary is that it’s a professional third-party unbeholden to the taxpayer that facilitates the exchange so that the taxpayer can derive the benefits of the tax deferral in section 1031 with the certainty that they’ve stayed within the safe harbor parameters set out in the treasury regulations.