Qualified intermediary

In United States tax law, a Qualified Intermediary (QI) is a person or entity that meets regulatory requirements to act as an intermediary in certain transactions, most prominently like-kind exchanges of real property under Internal Revenue Code section 1031 and the withholding and reporting of certain U.S.-source income paid to non-U.S. persons under Internal Revenue Code §1441 et seq.^[1][2]

IRC §1031 Qualified Intermediary

A §1031 Qualified Intermediary (QI), also known as an accommodator, is a company that facilitates Internal Revenue Code section 1031 like-kind exchanges. The role of a QI is defined in Treas. Reg. §1.1031(k)-1(g)(4). Under IRC section 1031, as amended by the Tax Cuts and Jobs Act of 2017, an owner of real property held for productive use in a trade or business or for investment may exchange that property for other like-kind real property within specified time periods and defer recognition of gain on the sale of the old property.^[3]

Anyone who is related to the taxpayer, or who has had a financial relationship with the taxpayer (aside from providing routine financial services^[4]) within the two years prior to the close of escrow of the exchange cannot serve as the QI (including employees), unless those services were "[s]ervices for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition of gain or loss under section 1031".^[5] This means that the taxpayer may only use his or her current attorney, accountant, investment banker, broker or real estate agent in exceptional circumstances.

A QI typically enters into a written exchange agreement with the taxpayer under which it acquires the relinquished property from the taxpayer and transfers it to the buyer, and then acquires the replacement property and transfers it to the taxpayer pursuant to section 1031 and the regulations. In a deferred exchange the QI receives and holds the proceeds from the sale of the relinquished property in a trust or escrow account and uses those funds to acquire the replacement property, so that the taxpayer does not have actual or constructive receipt of the sale proceeds.^[6]

In addition to holding and disbursing the exchange funds, qualified intermediaries generally coordinate with the other parties to the transaction, prepare or provide exchange documentation and monitor the statutory deadlines for identifying and acquiring replacement property in order to keep the exchange in compliance with section 1031.^[6]

Because qualified intermediaries hold exchange proceeds but are not subject to a comprehensive federal licensing regime, taxpayers are commonly advised to conduct due diligence on an intermediary's experience, internal controls and arrangements for safeguarding funds, and to consider factors such as transparent fee structures, segregation of client funds and the ability to meet critical deadlines when selecting a QI.^[6]

IRC §1441 Qualified Intermediary

IRC §1441 et seq. regulates the withholding of income taxes from payments of U.S. source income made to a non-U.S. person.^[7] Generally, the U.S. payor must verify the Tax Identification Number (TIN) of its payees and withhold 30% of this payment if a TIN is not presented.^[8] A §1441 Qualified Intermediary (QI) is generally a foreign bank or other foreign financial institution that signs an agreement with the Internal Revenue Service (IRS).^[9]

Under the agreement, the QI maintains its own records of the U.S. or foreign status of the beneficial owners of the payments and may assume primary Chapters 3 and 4 withholding responsibility and primary Form 1099 reporting and backup withholding responsibility for those payments.^[10][11] The detailed terms of the QI regime are set out in IRS revenue procedures, most recently Rev. Proc. 2022-43 (the "2023 QI Agreement"), which replaced the prior agreement under Rev. Proc. 2017-15 and provides for a six-year term.^[12][13] The QI entity is subject to an IRS or external audit periodically to confirm compliance with the agreement terms.

The §1441 QI regime was later supplemented by foreign account reporting and withholding requirements under the Foreign Account Tax Compliance Act (FATCA).^[14]

See also

• Internal Revenue Code section 1031
• Straw man (law)