What Your Qualified Intermediary Should Be Willing to Tell You
I received a call recently from a woman who had already hired a qualified intermediary for a tax-deferred 1031 exchange involving California property. Her closing was days away. She was confused — not about whether she wanted to do an exchange, but about the process itself. She had questions about her exchange agreement, about the documents she was being asked to sign, about how the pieces fit together. Her QI would not answer any of them.
She didn't know about California's withholding tax on real property sales — the FTB Form 593 process that allows a seller to certify a 1031 exchange exemption so escrow doesn't withhold 3⅓% of the gross sale price and remit it to the Franchise Tax Board. Her QI told her the form needed to be filed. He would not explain what it was, why it mattered, or what would happen if it wasn't handled correctly.
She asked about provisions in her exchange agreement. He told her to ask her attorney. She asked how the identification process worked. He told her to ask her tax advisor. She asked how her exchange funds would be held. He referred her to the agreement she had already told him she didn't understand.
I spent over half an hour on the phone with her — walking through the exchange process from beginning to end, explaining how the funds move, what the 45-day identification deadline means in practice, how to think about replacement property, what qualified escrow accounts are and why they matter. She had never heard any of it before. She was grateful, and she was relieved. She told me she has a second property she wants to exchange and would be calling me to handle it.
I share this story not to criticize a competitor — I will not name the firm — but because it illustrates a fundamental question every investor should ask before hiring a qualified intermediary: Will this person explain the process to me, or just process my paperwork?
The Paperwork-Processing Model
Some of the largest qualified intermediary firms in the country operate on a volume model. They employ large staffs of people who are trained to execute transactions — open files, generate documents, collect signatures, wire funds. The model is efficient. It handles thousands of like-kind exchanges per year. And it is, by design, limited.
The employees at these firms are not authorized to explain the documents the client is signing. They are not permitted to discuss how the exchange agreement interacts with the closing statement. They are not allowed to walk a client through the identification rules or explain what happens if an exchange fails. They are told — understandably, from a corporate liability perspective — that these are questions for the client's attorney or tax advisor.
The problem is that most clients don't have a 1031 exchange attorney. Their real estate attorney may handle the closing, but many have never facilitated an exchange. Their CPA prepares the return after the fact but may not be involved in the transaction planning. The client is left in a gap — too sophisticated to ignore what they don't understand, and too reliant on a QI who won't fill in the blanks.
What Your QI Should Be Willing to Explain
Let me be specific about what I mean. These are not legal questions. They are not tax questions. They are operational, procedural, and transactional questions that any experienced qualified intermediary should be able to answer:
How the exchange process works — all of it. Not just "we hold the funds and you identify property in 45 days." The full arc: what happens at the closing of your relinquished property, how the funds flow to the QI, how the identification period works in practice, what the 180-day deadline means, how the replacement property closing is coordinated, and how the funds are disbursed. Whether you are doing a forward exchange, a reverse exchange, or an improvement exchange, the QI should be able to walk you through the specific mechanics of your transaction — not just hand you a brochure.
What the exchange agreement says. This is the contract between you and your QI. It governs how your funds are held, what the QI can and cannot do with them, when funds can be released, and what happens if the exchange fails. If your QI won't walk you through this document — not as legal counsel, but as a party to the agreement explaining their obligations and yours — you should ask why.
How your funds are protected. Are your funds held in a qualified escrow account? A qualified trust? A pooled account? Are they FDIC-insured? Does the QI keep the interest, or do you? Is the account segregated — meaning your funds are held separately from other clients' funds and from the QI's own operating capital — or commingled? These are not legal questions. They are operational questions about how your money is being handled, and your QI should answer them clearly and completely.
What state-specific requirements apply. If you are selling property in California, your QI should be able to explain the FTB Form 593 withholding process — what it is, how to certify the exchange exemption, and what happens to your money if the form isn't filed correctly. If you are buying replacement property in a state that imposes transfer taxes or requires specific exchange documentation, your QI should flag that. This is not tax advice. It is transactional knowledge that a competent QI possesses and shares.
What happens if something goes wrong. What if you can't find replacement property in time? What if the deal falls through on day 170? What if you identify four properties by accident? What if your buyer wants to take cash at closing? A QI who has facilitated tax-deferred exchanges for decades has seen all of these scenarios — and should be willing to tell you what typically happens and what your options are, while directing you to your attorney or CPA for the legal and tax analysis.
How the documents fit together. The exchange agreement, the assignment of contract rights, the closing statement, the identification form, the notice of exchange to the title company — these are not isolated documents. They form an integrated structure that makes the exchange work. A client who doesn't understand how they fit together is a client who may inadvertently do something that jeopardizes the exchange. Explaining that structure is part of the job.
"I Can't Give Legal Advice" Is Not an Answer to Every Question
Let me be direct about this. The prohibition on unauthorized practice of law is real, and I take it seriously. As an attorney, I am perhaps more attuned to this boundary than most QIs. There are questions I will not answer because they require legal analysis — questions about whether a specific transaction structure qualifies under Section 1031, questions about the tax consequences of a particular decision, questions that call for the application of law to facts in a way that constitutes legal advice.
But "How does my exchange work?" is not a legal question. "What is the FTB Form 593?" is not a legal question. "How are my funds being held?" is not a legal question. "What happens if I miss the 45-day deadline?" is not a legal question — it is a factual question with a factual answer that every QI in the industry knows.
When a QI refuses to answer these questions, it is not because answering them would constitute unauthorized practice of law. It is because the firm has made a business decision to limit what its employees are permitted to say — typically because those employees do not have the background or training to answer competently, and the firm's risk management counsel has determined that silence is safer than a wrong answer.
That is the firm's prerogative. But it is not a service. And the client deserves to know the difference.
The Flat-Fee Question
While we are on the subject of what your QI should be willing to tell you, let me raise one more: How does your QI make money?
At Olympic Exchange Accommodators, we charge a flat fee for our services. The interest earned on your exchange funds belongs to you. We do not keep it, share it, or use it to subsidize a below-market exchange fee.
Not every firm operates this way. Some QIs charge a low upfront fee — sometimes remarkably low — and make their real revenue from the interest earned on exchange funds they hold. The client earns little or nothing on their own money while the QI invests it for a higher return. The exchange agreement typically authorizes this, often in language that most clients never read.
This is a legitimate business model. But you should understand it before you sign the agreement. And your QI should be willing to explain it clearly: how much interest your funds are expected to earn, how much of that interest you will receive, and how much the QI will keep. If the answer is "we keep all of it" or "it's in the agreement," that tells you something about the relationship.
Experience Is Not a Commodity
I have been facilitating 1031 exchanges since 1990 — forward exchanges, reverse exchanges, improvement exchanges, construction exchanges involving Exchange Accommodation Titleholders, exchanges involving California and Oregon withholding, and exchanges where the closing fell apart at the last minute and we had to restructure in real time.
That experience — and the willingness to share it — is not something you get from a firm that processes paperwork. It is something you get from a qualified intermediary who treats your tax-deferred exchange as a professional engagement, not a file number.
When you hire a QI, you are trusting someone with exchange funds that may represent your largest financial transaction. You deserve someone who will explain the process, answer your questions, and make sure you understand what you are signing before you sign it.
If your QI won't do that, you should ask yourself why — and whether there is someone who will.
Jeff Helsdon is a Certified Exchange Specialist® who has been facilitating tax-deferred like-kind exchanges since 1990. He is the principal of Olympic Exchange Accommodators in Tacoma, Washington, serving investors throughout Pierce County, the Puget Sound region, and Washington State.
Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Every exchange has unique facts and circumstances. Consult your own attorney, CPA, and financial advisor before making decisions about your 1031 exchange.
