A qualified intermediary is a neutral third party required by IRS regulations to facilitate a Section 1031 exchange by holding the proceeds from the sale of a relinquished property and later using those funds to acquire the replacement property on the investor's behalf. This structure exists specifically to prevent the investor from ever taking constructive receipt of the sale proceeds, which would immediately disqualify the transaction from tax deferral treatment, even if the investor fully intended to reinvest the money.
The qualified intermediary cannot be someone who has served as the investor's agent in another capacity within a recent period, such as an attorney, accountant, real estate agent, or broker who has provided services related to the transaction, which is why exchanges typically involve engaging an independent exchange company. Selecting a qualified intermediary happens before the sale of the relinquished property closes, since the exchange agreement and assignment of proceeds must be in place beforehand. This step is foundational to the mechanics described in any 1031 exchange guide.
Further reading: Understanding 1031 Exchanges: A Guide for Accredited Real Estate Investors
Watch: Lightstone DIRECT’s Jonathan Spitz on Why Now Is a Good Time to Invest (Short)
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