Choosing a qualified intermediary is not a formality. The QI stands between you and the successful completion of your 1031 exchange, while the exchange company may hold substantial proceeds during a time-sensitive transaction. Before signing, evaluate its compliance process, written agreement, conflict safeguards, deadline support, and protections for client funds. Investors managing a $3 million to $10 million exchange should expect clear answers and documentation, not vague assurances.
Effective 1031 exchange company due diligence means confirming that the intermediary is qualified, reviewing how exchange funds are held and insured against insolvency, examining the exchange agreement, and checking for disqualifying conflicts before transferring proceeds.
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A QI should provide a neutral, structured process that keeps the exchange moving while protecting your ability to meet IRS deadlines. For a broader framework, perform due diligence on your qualified intermediary, then use the checks below to compare providers with greater confidence.
Why Does Due Diligence Matter When Selecting a 1031 Exchange Company?
For investors managing a $3 million to $10 million exchange, 1031 exchange company due diligence is a core risk-management step, not an administrative formality. The qualified intermediary will help facilitate the transaction, coordinate the exchange structure, and hold funds during a time-sensitive process. The company you choose should therefore be evaluated with the same care as any other party handling a significant real estate transaction.
Confirm the intermediary is eligible to serve
A qualified intermediary is intended to be a neutral party that facilitates the exchange. That neutrality can be compromised when the intermediary has a recent professional relationship with the taxpayer. Under the IRS disqualified-person rule, someone who acted as the taxpayer’s employee, attorney, accountant, investment banker, broker, or real estate agent may be disqualified from acting as the QI. The two-year lookback period ends on the transfer date of the relinquished property.
Review the firm’s ownership, personnel, and prior relationship with your transaction before signing.
This review should also distinguish between a professional who can lawfully serve as a QI and one who is soliciting the QI role from an existing advisory relationship. If a CPA or attorney proposes QI services to their own tax or advisory client, ask how the firm addresses the prohibited-interest rule and whether an independent intermediary would be more appropriate.
Verify how exchange funds are protected
Fund security deserves special attention when the exchange proceeds are substantial. Ask where client funds are held, who controls disbursements, what safeguards apply if the intermediary becomes insolvent, and what insurance or other protection is available. Do not rely on a general statement that funds are secure. Request clear documentation and confirm that the coverage is adequate for the full amount you expect to transfer.
Before selecting a provider, performing due diligence on your qualified intermediary should include reviewing the exchange agreement, fund controls, and the firm’s experience with transactions of comparable size. A careful review helps you identify conflicts and security gaps before the relinquished property closes.
Questions to Ask Before You Sign with a QI
Before appointing a Qualified Intermediary, ask questions that clarify the agreement, the intermediary’s independence, and your rights during the exchange. Written answers can also help your tax and legal advisors review the arrangement before you sign.
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What exactly does the written exchange agreement require?
Ask the QI to explain each party’s responsibilities, including who acquires the relinquished property, transfers it, acquires the replacement property, and transfers it to you. The IRS definition of a QI requires a written exchange agreement covering these functions. Review the agreement for clear deadlines, notice requirements, fees, document responsibilities, and procedures for identifying and acquiring replacement property. Use this due diligence checklist for choosing a qualified intermediary as a starting point for your review.
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When can I access, pledge, or borrow against the exchange funds?
Ask the QI to identify the exact provisions governing the funds it holds. A compliant exchange agreement must expressly limit your right to receive, pledge, borrow, or otherwise obtain the benefit of that money or other property until the exchange is completed. The restriction is an important part of the exchange structure, so do not rely on a verbal summary. Ask your tax or legal advisor to explain any provision you do not understand. Review the IRS guidance on qualified intermediary agreements.
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Is the company independent and eligible to serve as my QI?
Ask whether the proposed QI, its owners, or its personnel have acted as your employee, attorney, accountant, investment banker, broker, or real estate agent during the two-year period ending on the transfer date. The IRS treats certain recent agents of the taxpayer as disqualified persons. Ask for a direct conflict check, not a general assurance that the company is experienced.
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Does an advisor have a prohibited interest in this appointment?
A CPA or attorney can lawfully serve as a QI in some circumstances. However. An advisor cannot recommend or refer their own tax or advisory clients to their own QI services when that creates the prohibited interest described under IRC Section 1.1031(k)-1(k). Ask who selected the QI, whether the referring advisor offers QI services, and whether the relationship has been reviewed for conflicts.
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What documentation will I receive before signing?
Request the complete exchange agreement, fee schedule, authorization forms, fund-handling provisions, and contact information for the responsible exchange team. Ask who can approve instructions and how changes will be authenticated. If an answer is vague, delayed, or inconsistent with the written agreement, pause and ask your independent tax or legal counsel to review it before proceeding.
How Do You Verify Fund Security Before Choosing a QI?
Fund security should be a documented part of your review, not a general promise. A qualified intermediary holds or controls exchange proceeds during a transaction, so ask how those funds are protected if the intermediary becomes insolvent. Request written answers that identify the account structure, the insurance or bond backing, the covered parties, and the limits that apply to your exchange.
Start with the coverage limit
FDIC deposit insurance generally covers up to $250,000 per depositor at each insured bank, subject to the applicable ownership and account rules. That limit is far below the $3 million to $10 million exchange amounts many high-value investors are managing. Ask whether the proposed protection covers the full balance or only a portion of it. Also ask whether the stated limit is per transaction, per account, per client, or an aggregate limit shared across all clients.
Industry offerings vary significantly. For example, IPX1031 describes a $100 million fidelity bond on its exchange-funds risk page: review its explanation of exchange fund protection. Other providers may state coverage in the $1 million to $10 million range. A large headline number is not the same as full protection for your transaction. The relevant question is whether the available coverage remains adequate after considering every other claim against the policy or bond. For a deeper comparison of protection structures, see how 1031 exchange fund security works with FDIC and segregated accounts.
Ask for proof, not a brochure
Request the current certificate of insurance, fidelity bond documentation, or other written evidence supporting the protection described by the 1031 exchange company. Ask for the insurer or surety name, policy or bond limits, effective dates, exclusions, deductibles, and the process for making a claim. Confirm whether client funds are covered directly and whether insolvency of the intermediary is an expressly covered risk. If the company will not provide meaningful documentation, treat that as an unresolved due diligence issue.
Aspen Exchange fully insures client funds beyond FDIC limits with no upper limit. In practical terms, a $10 million exchange can have $10 million in insured funds. Aspen Exchange states that no other 1031 exchange company offers this unlimited coverage. Compare that standard against the actual value of your exchange, then preserve the company’s written response with your transaction records. Fund security is not a secondary feature. It is a core test of whether the intermediary’s protection matches the risk you are asking it to manage.
What Red Flags Signal a Low-Quality QI?
A qualified intermediary should provide neutral, documented, and transparent administration. Be cautious if a provider cannot answer basic questions about conflicts, funds, agreements, or insurance before you transfer exchange proceeds.
- A recent advisor is serving as the QI. The IRS treats a person who acted as your employee, attorney, accountant, investment banker, broker, or real estate agent within the two-year period before the property transfer as a disqualified person. That person cannot serve as your qualified intermediary. Review the IRS explanation of the disqualified-person rule.
- Your CPA or attorney is referring you to their own QI service. A CPA or attorney can lawfully serve as a QI in the right circumstances, but cannot recommend or refer their own tax or advisory clients to that QI service. That prohibited interest creates a conflict under IRC Section 1.1031(k)-1(k).
- The provider will not explain fund protection. Ask whether exchange funds are held separately, what happens if the intermediary becomes insolvent, and whether the company carries a fidelity bond or other applicable coverage. A vague answer is not adequate for a multimillion-dollar exchange.
- There is no written exchange agreement. The agreement should define the QI’s responsibilities, the handling of funds, and the limits on your access to those funds during the exchange. Do not rely on verbal assurances.
- Insurance details are withheld. Request the coverage type, limits, exclusions, and a clear explanation of whether protection is sufficient for your exchange amount. Also ask for references from investors or professional advisors who have worked with the company.
The consequences of poor guidance can be substantial. In Winters v. Dowdall, a taxpayer lost more than $604,000 after receiving bad qualified intermediary advice. The case is a reminder to verify a provider’s qualifications and recommendations independently before signing. Read the case reference and due-diligence discussion.
What the Best 1031 Exchange Companies Offer That Others Don’t
For a high-value exchange, the right comparison is not simply whether a qualified intermediary can prepare documents and meet deadlines. The more important question is whether its safeguards are proportionate to the funds it will hold. Investors managing $3 million to $10 million should examine the actual protection available during the exchange, not rely on general assurances about experience or stability.
| Due diligence factor | Typical or commodity QI | Higher-standard QI |
|---|---|---|
| Protection beyond FDIC coverage | May rely primarily on FDIC coverage, which is limited to $250,000 per depositor at an insured bank. | A protection structure designed to cover the full exchange balance, including amounts above standard FDIC limits. |
| Fidelity bond | May disclose a bond commonly ranging from $1 million to $10 million. | Provides documented coverage that is substantial relative to the exchange and explains its limits. |
| Errors and omissions insurance | May carry E&O coverage commonly ranging from $1 million to $30 million, but the policy limit may not match the client’s funds. | Explains what the policy covers, what it excludes, and how it works alongside protection for held funds. |
| Account controls | Uses segregated accounts or other custody procedures, but investors must confirm how accounts are titled and controlled. | Provides clear documentation of account segregation, authorization controls, and the process for releasing funds. |
| Unlimited fund insurance | No unlimited insurance protection is offered. | Aspen Exchange fully insures client funds beyond FDIC limits with no upper limit. A $10 million exchange equals $10 million insured. |
For a $3 million to $10 million exchange, $250,000 of FDIC coverage protects only a small portion of the balance. A fidelity bond or E&O policy can be meaningful, but investors still need to understand the policy limits. Exclusions, claims process, and whether the coverage responds to intermediary insolvency. A segregated account is an important control, but segregation alone does not guarantee recovery if the intermediary fails. To compare costs alongside protection, review what 1031 exchange qualified intermediary fees include.
A strong Aspen Exchange due diligence review should therefore ask for precise answers in writing: How are funds protected? What is the maximum covered amount? Does coverage apply to the entire exchange balance? Aspen Exchange states that it is the only 1031 exchange company offering full insurance beyond FDIC limits with no upper limit. That distinction can matter more than a familiar brand name when the amount at risk is measured in millions. For a complete overview of 1031 exchange compliance, see the full 1031 exchange rules guide.
Frequently Asked Questions
What should you ask a 1031 exchange company before hiring them?
Ask who will hold your exchange funds, how those funds are protected against insolvency, what insurance applies, and how the company documents deadlines and transactions. Request clear answers in writing, along with the exchange agreement and a description of the QI’s role.
How do I verify that a qualified intermediary is legitimate?
Review the company’s written exchange agreement, operating history, fund-control procedures, insurance documentation, and process for identifying conflicts. A QI must not be a disqualified person and must enter into a written exchange agreement with the taxpayer under IRS regulations (IRS guidance).
Can my CPA or attorney act as my qualified intermediary?
A CPA or attorney may lawfully serve as a QI in some circumstances. But an advisor cannot refer their own tax or advisory client to their own QI service because that creates a prohibited-interest conflict. Discuss the relationship with your tax or legal professional before proceeding.
What happens if a qualified intermediary becomes insolvent?
Your ability to recover funds may depend on how the money was held and what insurance or other protections applied. That is why fund custody, insolvency protection, and coverage limits should be central questions in your due diligence. Aspen Exchange fully insures client funds beyond FDIC limits with no upper limit, according to its customer information.
What should a 1031 exchange agreement say about my funds?
The agreement should explain the parties’ rights and obligations and address access to funds during the exchange. IRS guidance says it must limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money held by the QI until the exchange is completed (IRS guidance).
Ready to Review Your 1031 Exchange Company Choice?
A qualified intermediary should be able to answer your questions about exchange procedures, fund security, and documentation clearly. Aspen 1031 Exchange can help you evaluate your due diligence priorities before you move forward. Schedule a consultation by calling (310) 890-8283 to discuss your 1031 exchange due diligence needs.