Intermediary Services

The qualified intermediary (QI) is an entity or individual independent of the exchangor and not deemed to be its agent, either objectively or subjectively. Under the objective test, the QI cannot be the taxpayer's closing attorney or anyone else who has had a business relationship with the exchangor during the last two years.

The purpose of the QI is to be the recipient of the net proceeds from the closing of the relinquished property, with the money impounded for subsequent reinvestment into other realty. Any earnings on these monies may not be paid to the exchangor until the end of the exchange.

In a four-party deferred exchange, the QI is the fourth party, with the other three being the exchangor, the buyer and the replacement property owner. These relationships are defined in the required documentation, executed with the buyer's cooperation because of contractual requirements.  These documents would include notice to the parties of the use of direct deeding, in which the exchangor would deed the realty being disposed directly to the buyer, while the replacement property owner's deed would name the exchanging taxpayer as the grantee. The QI would not need to take legal title to the realty being relinquished or exchanged.

IRS Revenue Ruling 2002-83 prohibits a QI from using the impounded funds to acquire the property of a party related to the exchangor to be used as the replacement realty. Such a disposition by the related party would be deemed a sale under IRC 1031(f), precluding any party from cashing out during the two-year period following the exchange.