For the entire window between selling your relinquished property and closing on your replacement property, your exchange funds don’t sit in your bank account or in escrow. They sit with a Qualified Intermediary (QI), the company that holds and administers your funds throughout the transaction, and you have no direct access to them until it’s time to close.
That structure is standard practice under Section 1031, and it works well every day for thousands of investors. But it also means the QI you choose matters more than most people realize going in. Qualified intermediaries are not regulated the same way as traditional banks.
There is no FDIC insurance on exchange funds and no single federal agency supervising the industry. The strength of your protection comes down to the specific safeguards the company you chose has put in place and how transparent they are about them.
The good news: those safeguards are knowable. A well-run QI will have clear, documented answers to a list of questions about how they’re capitalized, insured, and structured. A newer or smaller shop may not. This is not necessarily because they’re doing anything wrong, but because they simply haven’t built out that infrastructure yet. Either way, you’re entitled to ask before you commit your funds. Furthermore, a professional QI will expect the question and answer it plainly.
Here’s what to ask.
Who Owns the Company?
Start here. Is your QI an independent operation, or is it backed by a larger, well-capitalized parent company? Some of the more established QIs are subsidiaries of major title insurance underwriters. These companies also own well-known names in title and escrow. That kind of ownership structure adds a layer of institutional capital and oversight behind the entity holding your funds.
Ask directly who owns the company and what their financial position looks like. A confident, specific answer is a good sign. A vague response is worth following up on.
How Big is their Fidelity Bond?
A fidelity bond protects you against theft or fraud by the QI’s own employees. Ask for the coverage amount, and ask to see the actual bond rather than a summary of it. The stronger operators in this industry carry bonds in the tens of millions. A QI that can readily produce this documentation has nothing to hide, and that’s exactly what you want to see. You should always request proof of this bond.
How Big is Their E&O Policy?
Errors and Omissions insurance covers mistakes. The wrong wire instructions, a missed deadline, and a documentation error that puts an exchange at risk. The coverage amount matters, but so does the structure. “Per occurrence” means each claim gets its own coverage limit, rather than all claims in a policy period sharing one pool. Ask to see the policy itself, not just a summary of the coverage. You should always request proof of this insurance policy.
Is There a Performance Guarantee?
This is a safeguard many exchangers don’t know to ask about. A performance guarantee is a financial backstop, often provided by a parent company, that stands behind the QI’s obligations to you. Not every QI offers one. Ask whether yours does, and ask to see supporting documentation.
Where Exactly is Your Money Sitting?
Ask for the names of the banks holding your funds and how those relationships were selected. A well-run QI has a treasury function that vets banking partners on solvency ratings, daily reconciliation practices, and institutional size. They should be able to walk you through that process in plain terms.
Is Your Account Individually Segregated?
Your funds should sit in an account opened specifically under your own Tax ID Number, separate from any other client’s funds, not pooled together in a shared master account. Segregated accounts are a meaningful protection: they keep your funds clearly identifiable and separate from the company’s own operating funds and from other clients’ exchanges.
How Long Has the Company Itself Been in Business?
It’s worth distinguishing between the tenure of individual staff members and the age of the company. A firm might highlight decades of “combined experience” across its team, which is a fair thing to be proud of, but it’s a different data point than how long the entity itself has operated. Both are useful to know.
Do They Have Certified Exchange Specialists® on staff?
This is a recognized credential, awarded by the Federation of Exchange Accommodators to professionals who have met experience requirements and passed a rigorous exam. It’s not required, but it’s a reasonable signal of depth of expertise on staff.
Is This the Company’s Primary Line of Business?
Ask whether the company’s focus is exchanges exclusively or whether it also operates in other areas such as brokering deals, selling DSTs, or other lines of business. Neither answer is automatically disqualifying, but it’s useful context: a firm singularly focused on exchanges has built its entire operation around getting this one thing right.
The Bottom Line
A 1031 exchange depends on your funds being well cared for during the exchange period. Asking these questions up front, and expecting clear, documented answers, is simply good due diligence, the same as you’d apply to any significant financial decision. Most established QIs will welcome the conversation. If you have any questions, give us a call at (760) 930-0569.
