1031 Exchange Qualified Intermediary: Who Cannot Be Yours

Marcos Gil Realty · Investor notes

The hardest part of setting up a 1031 exchange is usually not finding a qualified intermediary. It is learning that several of the people you already trust are barred from being one — by name, in the regulation.

Kentucky sellers researching a 1031 exchange tend to arrive at the qualified intermediary question late, after the relinquished property is already under contract. The deadlines are the famous part. The eligibility of the person holding the money is the part that quietly disqualifies a plan, and it is governed by one paragraph of the Treasury regulations rather than by anything in Kentucky law.

Who cannot be your qualified intermediary?

Your own real estate agent or broker, attorney, accountant, employee, or investment banker or broker, if they served you within the two years before the exchange. The regulation calls them disqualified persons.

The list sits in Treasury Regulation § 1.1031(k)-1, paragraph (k)(2). A disqualified person is first of all “the agent of the taxpayer at the time of the transaction,” and the regulation then extends that status backwards in time: “a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of the taxpayer at the time of the transaction.”

Read that clock carefully. It is not two years before you start shopping for an intermediary. It runs backwards from the date the first relinquished property transfers. So the listing agent who sold your duplex is a disqualified person for that exchange, and so is the CPA who filed your return last spring — not because anyone did anything wrong, but because the regulation treats prior service as agency and agency as disqualifying.

Which prior services do not count against the two-year test?

Two categories. Services on prior § 1031 exchanges, and routine financial, title insurance, escrow or trust services performed by a financial institution, title insurance company or escrow company.

Paragraph (k)(2) states that “solely for purposes of this paragraph (k)(2), performance of the following services will not be taken into account”: first, “services for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition of gain or loss under section 1031”; second, “routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company.”

That second carve-out answers a question Kentucky sellers ask often. The title company that closed your last purchase is not disqualified by having done so, provided the services were the routine ones the regulation describes. And the first carve-out is why an intermediary who has run exchanges for you before does not disqualify themselves by repeat business. Those are the only two exclusions in the paragraph; everything else in the service list stands.

Is there an ownership test as well as a service test?

Yes — and it is set at ten percent, not fifty. Paragraph (k)(3) applies the related-party tests of Internal Revenue Code § 267(b) and § 707(b) with “10 percent” substituted everywhere those sections say “50 percent.”

Paragraph (k)(4) then extends the same ten-percent relationship test to the connection between the intermediary and a disqualified person under (k)(2) — so an exchange company owned by your attorney’s family is reached even though the attorney is not the intermediary. One narrow exception appears in (k)(4)(ii) for a bank or bank affiliate caught only by controlled-group membership with a provider of investment banking or brokerage services, for relinquished-property transfers made on or after 17 January 2001. For most Kentucky investors the practical takeaway is simpler: a small ownership stake you considered immaterial can be the thing that fails the test.

What has to be in the exchange agreement itself?

An express limit on your rights to the money. Paragraph (g)(4)(ii) applies the safe harbour “only if the agreement between the taxpayer and the qualified intermediary expressly limits the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits” of the funds.

The definition of a qualified intermediary in (g)(4)(iii) has two halves: the person is not the taxpayer or a disqualified person, and the person “enters into a written agreement with the taxpayer (the ‘exchange agreement’) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer.” Paragraph (g)(4)(v) supplies the mechanism almost every real transaction actually uses — assignment: the intermediary is treated as entering into the agreement “if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property.” Written notice, on or before. Not after the deed is recorded.

Two further sentences in (g)(4) are the ones worth showing to anyone who thinks the structure is a formality. Subparagraph (vi): the safe harbour “ceases to apply at the time the taxpayer has an immediate ability or unrestricted right to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary,” and “rights conferred upon the taxpayer under state law to terminate or dismiss the qualified intermediary are disregarded for this purpose.” Subparagraph (vii), going the other way, confirms that a taxpayer “may receive money or other property directly from a party to the transaction other than the qualified intermediary without affecting” the safe harbour.

Where does this sit relative to the deadlines?

Before them. The intermediary has to be engaged and assigned into the contract before the relinquished property transfers, because that transfer is the event that starts both clocks.

The identification and exchange periods both begin on the date the taxpayer transfers the relinquished property, and the regulation’s own words are that the identification period “ends at midnight on the 45th day thereafter” while the exchange period ends at midnight on the earlier of the 180th day or the due date, including extensions, for that year’s return. The mechanics of those two windows, including which Kentucky sellers get fewer than 180 days, are covered on our Kentucky 1031 exchange overview and in the note on identifying replacement property. The point for this page is sequencing: a disqualified-person problem discovered on day 44 cannot be fixed by finding a better intermediary, because the transfer that started the clock has already happened through the wrong hands.

A word on how this plays out in practice, as general craft rather than a story about any particular file: the exchanges that fail do not usually fail on the replacement property. They fail on a step that felt administrative — the assignment notice that went out after closing, or the intermediary a seller picked because a familiar professional offered to handle it. The paperwork that looks like formality is the safe harbour. Kentucky’s own closing costs and transfer-tax mechanics are a separate question, handled in who pays Kentucky transfer taxes.

Can my REALTOR® hold the exchange proceeds?

No. Treasury Regulation § 1.1031(k)-1(k)(2) names “real estate agent or broker” in the list of prior services that make a person a disqualified person for the two-year period ending on the date the first relinquished property transfers, and (g)(4)(iii)(A) requires that a qualified intermediary not be a disqualified person.

Does the title company that closed my last Kentucky purchase count?

Not on that basis alone. Paragraph (k)(2)(ii) excludes “routine financial, title insurance, escrow, or trust services for the taxpayer by a financial institution, title insurance company, or escrow company” from the two-year service test. Whether a particular engagement was routine is a question for your own tax counsel.

How is the exchange reported to the IRS?

On Form 8824, Like-Kind Exchanges, filed with the return for the year in which the relinquished property transferred. The current form and its instructions are published by the IRS at irs.gov. Your CPA or tax attorney prepares it; a real estate licensee does not.

This is general information about a federal tax regulation, not tax or legal advice, and no outcome is promised. I am your real estate agent — not your lender, your accountant or your attorney. Regulation text quoted from the published version of 26 CFR § 1.1031(k)-1 read on 23 October 2026; confirm the current text and your own facts with a qualified tax adviser before acting.

By Marcos Gil, REALTOR® — Keller Williams Commonwealth · KY Real Estate License No. 296259 · Call or text (859) 310-1209.
Last updated 23 October 2026.