Who Holds the Proceeds in a 1031 Exchange?

In a 1031 exchange, the proceeds from the sale of the relinquished property cannot be held by the taxpayer (investor) or anyone closely related to them. If the taxpayer receives or controls the funds, even temporarily, the exchange will be disqualified, and capital gains taxes will be owed.

What Is a Qualified Intermediary (QI) in a 1031 Exchange?

A Qualified Intermediary (QI)—also called an Accommodator or Exchange Facilitator—is a neutral third party who holds the proceeds from the sale to ensure the transaction complies with IRS Section 1031 rules.

Who Holds the Proceeds in a 1031 Exchange?

What Does a Qualified Intermediary Do?

A QI plays a critical role in completing a valid 1031 exchange by:

  • Holding the Proceeds Securely – The QI keeps the funds in a separate escrow account until they are used to purchase the replacement property.
  • Facilitating the Exchange Process – The QI ensures compliance with IRS deadlines, including the 45-day identification period and 180-day purchase period.
  • Preventing Disqualification – By handling the funds, the QI ensures the investor does not have constructive receipt of the money, which would invalidate the exchange.
1031 exchange compliance rules

Who Can Be a Qualified Intermediary?

To qualify as a QI, the individual or company must be an independent third party. The following people cannot act as a Qualified Intermediary:

  • The taxpayer (investor) themselves
  • A family member or anyone related to the taxpayer
  • The taxpayer’s real estate agent, attorney, accountant, or financial advisor (if they provided services within the last two years)
  • A business partner or anyone with a financial interest in the transaction
Tax benefits of using a QI

What Happens If the Investor Holds the Proceeds?

If the investor or a disqualified person takes control of the 1031 exchange proceeds, the IRS will invalidate the exchange. This means:

  • The investor owes capital gains taxes on the sale.
  • Depreciation recapture taxes may be due.
  • The investor could also face a net investment income tax, depending on their tax situation.

How to Ensure a Successful 1031 Exchange

To defer capital gains taxes successfully, the 1031 exchange funds must be held by a Qualified Intermediary who is independent and unrelated to the taxpayer. Always work with a reputable QI and consult a tax professional to avoid costly mistakes.

Real estate investor in a 1031 exchange

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Secure escrow account for 1031 funds