1031 Exchange Company Due Diligence: The Complete Checklist
Choosing a qualified intermediary is not a formality. The QI stands between you and the successful completion of your exchange, and the company you select may hold substantial proceeds during a time sensitive transaction. Before you sign anything, 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, documented answers, not vague reassurances.
Effective 1031 exchange company due diligence means confirming that the intermediary is legally eligible to serve, reviewing how exchange funds are held and insured against insolvency, examining the exchange agreement line by line, and checking for disqualifying conflicts before you transfer a single dollar of proceeds.
Schedule a consultation with Aspen Exchange to review your qualified intermediary options and confirm that your funds will be fully protected.
A qualified intermediary should provide a neutral, structured process that keeps the exchange moving while protecting your ability to meet IRS deadlines. For a broader framework on vetting a QI from the start, see our checklist for choosing a qualified intermediary, then use the detailed checks below to compare providers with real 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 paperwork you get through before the real work begins. The qualified intermediary facilitates the transaction, coordinates the exchange structure, and holds your funds during a time sensitive process that can stretch across many weeks. The company you choose deserves the same scrutiny you would apply to any other party handling a significant real estate transaction.
Confirm the intermediary is eligible to serve
A qualified intermediary is supposed to be a neutral party that facilitates the exchange. That neutrality is 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 within the prior two years may be disqualified from acting as the QI. That two year lookback period ends on the transfer date of the relinquished property.
Review the firm’s ownership, personnel, and any prior relationship to your transaction before you sign an engagement letter.
This review should also separate a professional who can lawfully serve as a QI from one who is soliciting the QI role out of an existing advisory relationship. If a CPA or attorney proposes QI services to their own tax or advisory client, ask directly how the firm addresses the prohibited interest rule and whether an independent intermediary would be the more appropriate choice.
Verify how exchange funds are protected
Fund security deserves special attention whenever 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 actually 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, not just a portion of it.
Before selecting a provider, performing due diligence on a qualified intermediary should include reviewing the exchange agreement, the fund controls, and the firm’s experience with transactions of a comparable size. A careful review helps you identify conflicts and security gaps before the relinquished property ever 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 also give your tax and legal advisors something concrete to review before you sign.
- What exactly does the written exchange agreement require? Ask the QI to explain each party’s responsibilities, including who acquires the relinquished property, who transfers it, who acquires the replacement property, and who transfers that property to you. The IRS definition of a qualified intermediary requires a written exchange agreement covering these functions. Review the agreement for clear deadlines, notice requirements, fees, document responsibilities, and the procedures for identifying and acquiring replacement property.
- 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. That restriction is a core 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 fully understand.
- 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, so ask for a direct conflict check, not a general assurance that the company is experienced.
- 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 doing so creates the prohibited interest described under IRC Section 1.1031(k)-1(k). Ask who selected the QI, whether the referring advisor also offers QI services, and whether the relationship has been reviewed for conflicts.
- 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 to those instructions 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 you proceed.
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 the transaction, so ask directly how those funds are protected if the intermediary becomes insolvent. Request written answers that identify the account structure, the insurance or bond backing, the parties covered, and the limits that apply specifically 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 today. Ask whether the proposed protection covers the full balance of your exchange or only a portion of it, and ask whether the stated limit is per transaction, per account, per client, or an aggregate limit shared across every client the firm serves.
Industry offerings vary significantly on this point. Some providers describe fidelity bonds in the tens of millions of dollars on their published fund protection pages, while others state coverage somewhere in the $1 million to $10 million range. A large headline number is not the same thing as full protection for your specific transaction. The relevant question is whether the available coverage remains adequate after considering every other claim that could be made against the same policy or bond. For a deeper comparison of protection structures, see our guide to 1031 exchange fund security and FDIC insured 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, the 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 rather than a minor inconvenience.
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, a standard the company states no other 1031 exchange company currently offers. 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 to check after everything else looks good. It is a core test of whether the intermediary’s protection actually matches the risk you are asking it to manage.
How to Evaluate a 1031 Exchange Company’s Track Record and Stability
Fund protection and written agreements matter, but they sit alongside a broader question: does this company have the operational history and financial stability to manage your exchange without disruption? A firm that has handled thousands of exchanges across multiple market cycles has generally worked through the practical complications, from lender delays to last minute title issues, that can threaten an exchange timeline. A newer or smaller operation is not automatically a poor choice, but it deserves closer questions about staffing, systems, and how it would handle an unexpected event during your specific transaction window.
Ask how many exchanges the company completes in a typical year, how long the current leadership team has been in place, and whether the firm has ever failed to return funds or missed a documented deadline on a client’s behalf. A company confident in its own track record will usually answer these questions directly rather than redirecting you to marketing materials. If the firm cannot describe its claims history, or becomes evasive about past disputes, treat that hesitation as part of your overall risk assessment rather than an isolated detail.
References can also be part of a thorough review. Ask the qualified intermediary for the name of a CPA, real estate attorney, or commercial broker who has referred multiple clients to the firm and would be willing to speak about their experience. A firm that regularly earns repeat referrals from professional advisors, rather than one time clients, has usually demonstrated consistent service quality across many different transaction types and deal sizes.
A Step by Step Due Diligence Checklist Before You Sign
Before you commit to a 1031 exchange company, work through each of the following steps in order. Treating due diligence as a structured process, rather than a single conversation, reduces the chance that an important question gets overlooked while you are focused on closing your relinquished property.
- Confirm the intermediary and its personnel are not disqualified persons under the two year lookback rule.
- Request the full written exchange agreement and review every provision governing access to funds.
- Ask where funds are held, how accounts are segregated, and who is authorized to approve a disbursement.
- Request written proof of insurance and bonding, including the insurer name, limits, exclusions, and claims process.
- Confirm whether coverage extends beyond standard FDIC limits and, if so, by how much.
- Ask about the firm’s deadline tracking process and how it communicates the 45 day and 180 day milestones.
- Clarify the complete fee schedule, including any charges for additional properties, wire transfers, or expedited service.
- Ask how the company handles interest earned on exchange funds while they are held during the exchange period.
- Request references from CPAs, attorneys, or brokers who have worked with the firm on comparable transactions.
- Put every material answer in writing and keep it with your transaction file in case questions arise later.
None of these steps needs to take more than a phone call or a short written response from a well run exchange company. If a provider treats these questions as unusual or unnecessary, that reaction alone tells you something important about how they might handle a problem during your actual exchange.
What Red Flags Signal a Low Quality QI?
A qualified intermediary should provide neutral, documented, and transparent administration from the first conversation. Be cautious if a provider cannot answer basic questions about conflicts, funds, agreements, or insurance before you transfer exchange proceeds. Common red flags include:
- 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, no matter how much you trust them personally.
- 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, no matter how reputable the firm appears.
- 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 before.
- The firm pressures you to move faster than your advisors are comfortable with. A legitimate qualified intermediary understands that you need time to review the exchange agreement with counsel. Pressure to sign quickly, skip questions, or wire funds before you have received documentation is a warning sign, not a sign of efficient service.
- Fee quotes change after you have already committed. A due diligence process that starts with one fee estimate and ends with additional undisclosed charges suggests weak internal controls in other areas as well, including how the firm handles your exchange funds.
The consequences of poor guidance can be substantial. In one widely cited case, Winters v. Dowdall, a taxpayer lost more than $604,000 after receiving bad qualified intermediary advice. The case is a useful reminder to verify a provider’s qualifications and recommendations independently before signing anything.
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. Nearly every firm in the industry can do that much. The more important question is whether its safeguards are proportionate to the funds it will actually hold. Investors managing $3 million to $10 million should examine the real protection available during the exchange, not rely on general assurances about experience or company 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 in plain language. |
| 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 actual 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, so 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 slice of the balance. A fidelity bond or an errors and omissions policy can be meaningful, but investors still need to understand the policy limits, the exclusions, the claims process, and whether the coverage actually responds to intermediary insolvency. A segregated account is an important control on its own, but segregation alone does not guarantee full recovery if the intermediary fails. To compare costs alongside protection, review what 1031 exchange qualified intermediary fees typically include.
A strong due diligence review should ask for precise answers in writing: How are funds protected? What is the maximum covered amount? Does coverage apply to the entire exchange balance or only part of it? Aspen Exchange states that it is the only 1031 exchange company offering full insurance beyond FDIC limits with no upper limit, a distinction that can matter more than a familiar brand name when the amount at risk is measured in the millions. For a complete overview of exchange compliance, see the full 1031 exchange rules guide, and for the difference between an intermediary and a standard escrow company, see our 1031 exchange intermediary versus escrow company 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 plain description of the QI’s role in your specific deal.
How do I verify that a qualified intermediary is legitimate?
Review the company’s written exchange agreement, its operating history, its fund control procedures, its insurance documentation, and its 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.
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 with that arrangement.
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 exactly why fund custody, insolvency protection, and coverage limits should be central questions in your due diligence rather than an afterthought. Aspen Exchange fully insures client funds beyond FDIC limits with no upper limit, according to its published fund protection policy.
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 requires the agreement to limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefit of money held by the QI until the exchange is completed.
Is a bigger, more familiar exchange company automatically safer?
Not necessarily. Brand recognition and years in business are worth considering, but they are not a substitute for confirming the actual protection stack in writing. A smaller firm with fully documented insurance, segregated accounts, and dual authorization controls may offer stronger practical protection than a larger firm that relies on general reassurances about its reputation.
How long does 1031 exchange company due diligence usually take?
A thorough review can often be completed within a few days if the qualified intermediary is responsive and provides documentation promptly. Investors on a tighter closing timeline should start this process as soon as a sale is being negotiated, rather than waiting until the relinquished property is already under contract, since a slow or evasive response from a prospective QI is itself useful information.
Should I get a second opinion from my CPA or attorney before signing?
Yes. Your CPA or real estate attorney can review the exchange agreement, the fund protection documentation, and the fee schedule alongside you, and can flag provisions that deserve more explanation. A second set of professional eyes on the agreement is a normal and prudent part of due diligence for an exchange of this size, not a sign that something is wrong.
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 and in writing. Aspen Exchange can help you evaluate your due diligence priorities before you move forward with any transaction. Contact Aspen Exchange to discuss your 1031 exchange due diligence needs before your relinquished property closes.
This article is educational information, not tax, legal, or investment advice. Consult your own qualified advisors regarding your transaction.
