Short answer
A qualified intermediary's duties come from three places: the federal regulations, which say what a QI must do for the exchange to qualify; your written exchange agreement, which sets the QI's specific obligations and usually limits its liability; and state law, which in some states licenses exchange facilitators and requires bonds, insurance and separate accounts. If a QI's mistake causes your exchange to fail, you may have claims for breach of contract or negligence, but the agreement's liability limits and the way courts measure tax damages often decide how much you can recover. Part I covered how QIs fail; this part covers duties and remedies.
| Duty | Source | What a failure looks like |
|---|---|---|
| Enter a written exchange agreement before the sale closes | Federal regulations | Agreement signed after closing; exchange fails |
| Take assignment of the sale and purchase contracts, with notice to the other parties | Federal regulations | No assignment or notice in the file |
| Hold the proceeds and not release them before the permitted dates | Federal regulations and the agreement | Funds released early at the client's request; exchange fails |
| Accept and keep your identification notice | The agreement | Identification lost or not acknowledged |
| Wire funds to the replacement closing on time | The agreement | Late or misdirected wire; closing misses day 180 |
| Keep funds safe, segregated and available | The agreement and, in some states, statute | Funds commingled, invested in illiquid assets or misused |
| Hold a bond and insurance; avoid misleading statements | State law, where it applies | No bond, or false claims about how funds are held |
On this page
The federal duties
The safe harbor in Treas. Reg. §1.1031(k)-1(g)(4) defines a qualified intermediary as someone who isn't you or a disqualified person, who enters a written agreement with you, and who acquires and transfers the properties, which an assignment of the contracts satisfies. Under (g)(6), the agreement must limit your right to receive, pledge, borrow or otherwise get the benefit of the money before the allowed dates. These rules protect the exchange; they don't by themselves give you a right to sue. Your rights against the QI come from the agreement and state law. For who can't serve as your QI, see disqualified persons.
Exchange agreement clauses to read before you sign
| Clause | What to look for | Why it matters |
|---|---|---|
| Limitation of liability | Liability capped at the fee, or limited to gross negligence | Can make a claim worth only a few hundred dollars |
| Exclusion of consequential damages | No liability for taxes, lost profits or penalties | Taxes owed after a failed exchange are often called consequential |
| Tax disclaimer | QI gives no tax advice and doesn't guarantee qualification | Shifts responsibility for structure to you and your advisors |
| Fund handling | Where funds are held, in whose name, and whether you approve withdrawals | Determines whether funds can be reached by the QI's creditors |
| Wire procedures | Call-back confirmation; no changes by email | Decides who bears a wire fraud loss |
| Indemnity | You indemnify the QI for claims | Can make you pay the QI's legal costs |
| Dispute terms | Arbitration, venue, governing law, short deadlines to bring claims | Can limit where and when you can sue |
You can ask to change these terms before you sign. A QI that refuses to name its bond, insurance and bank in writing is a warning sign; see how to know your money is safe.
Possible claims if a QI's mistake ruins your exchange
| Claim | What you generally must show | Notes |
|---|---|---|
| Breach of contract | The agreement required something the QI didn't do, and you lost money as a result | Most direct claim; subject to the agreement's limits |
| Negligence | The QI failed to act with reasonable care, causing your loss | Some courts limit tort claims when a contract covers the same duty |
| Breach of fiduciary duty | The QI held your funds in trust and misused or mishandled them | Whether a QI is a fiduciary depends on state law and the agreement |
| Conversion, fraud or theft | The QI took or misused your money, or lied | Liability limits usually don't protect intentional wrongdoing |
| Claims under state facilitator laws | A violation of a state statute, where one applies | Some statutes add remedies or consumer protection claims |
These are general categories. What applies depends on your state and your agreement, so take your file to a litigation attorney.
What a failed exchange can cost, and what you might recover
| Item | Amount |
|---|---|
| Gain on the sale | $500,000 |
| Tax due now because the exchange failed (illustrative) | $130,000 |
| Interest and penalties if the return was already filed | Varies |
| Extra costs: new financing, lost deposit on the replacement | $15,000 |
| QI fee | $1,200 |
A QI facing a claim may argue that the $130,000 isn't a loss at all, because you'd have owed it eventually when you sold the replacement property, and that your real loss is only the value of deferring it. Courts treat this differently. With a cap at the fee, recovery could be $1,200 unless the cap doesn't apply, for example because of gross negligence or fraud. That is why choosing the QI and reading the agreement matters more than suing afterward. If your QI goes bankrupt, the tax relief in Rev. Proc. 2010-14 may let you report the gain as you recover funds; see Part I.
State laws that regulate exchange facilitators
There is no federal license for QIs, but some states regulate them. Two examples:
- Nevada (NRS chapter 645G) requires exchange facilitators to be licensed and to carry a fidelity bond of at least $1,000,000 and errors and omissions insurance of at least $250,000, and to keep client funds separate.
- Washington (RCW chapter 19.310) requires a $1,000,000 fidelity bond or holding all funds in a qualified escrow or trust, at least $250,000 of errors and omissions coverage, and bars commingling and misleading statements.
Other states, including California, have their own rules, and many states have none. Your state's law can also govern your contract claims.
Steps after a QI error
- Act inside the deadlines first. If day 45 or 180 hasn't passed, fix what you can now, such as a new identification notice or a replacement closing; see 1031 deadlines.
- Get the file. Agreement, assignments, notices, wire records and every email.
- Notify the QI in writing and ask it to notify its insurer.
- Talk to your CPA about the tax year of the gain; see tax results of a failed or unwound exchange.
- Talk to an attorney before any claim deadline in the agreement passes.
Want to see our exchange agreement and how we hold funds before you choose? Book an intro call.
Frequently asked questions
Can I sue my qualified intermediary if my 1031 exchange fails?
You may have claims for breach of contract or negligence if the QI's mistake caused the failure. The exchange agreement's liability limits often decide how much you can recover.
Are qualified intermediaries fiduciaries?
It depends on state law and the exchange agreement. Many agreements say the QI is not a fiduciary, but some courts and statutes impose duties over the funds.
Are qualified intermediaries licensed?
Not federally. Some states, such as Nevada, license exchange facilitators, and others, such as Washington, require bonds and insurance.
What can I recover if my QI's error makes the exchange fail?
Possibly your extra costs and some measure of the tax harm, but QIs often argue the tax was only deferred, and liability caps may limit recovery to the fee.
What should I check in an exchange agreement before signing?
The liability cap, exclusions for tax damages, where funds are held and who approves withdrawals, wire procedures, and the dispute and deadline terms.
Sources
- Treas. Reg. §1.1031(k)-1 (qualified intermediary definition and limits on access to funds)
- Rev. Proc. 2010-14 (tax relief when a QI goes bankrupt)
- Nevada Revised Statutes chapter 645G, exchange facilitators (Nevada licensing, bond and insurance rules)
- Revised Code of Washington chapter 19.310, exchange facilitators (Washington bond, insurance and conduct rules)
- 26 U.S.C. §1031 (the exchange statute)
This article is general information, not tax or legal advice. Talk to your CPA or tax attorney about your situation.
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