How to Choose a Qualified Intermediary for a 1031 Exchange

By Richard Partin, Managing Member, Texas State Royalties LLC Fort Worth, Texas | Published: October 9, 2026 | Last Updated: October 16, 2026

Your Qualified Intermediary (QI) holds your exchange proceeds between the sale of the relinquished property and the purchase of the replacement property. If the QI fails — through insolvency, fraud, or mismanagement — your exchange proceeds may be lost and the entire gain becomes immediately taxable. Choosing the right QI is one of the most important decisions in a 1031 exchange.

Quick Answer: A Qualified Intermediary must be an independent third party who holds exchange proceeds in a segregated account, carries fidelity bond and E&O insurance, and has experience with mineral interest exchanges. Under IRS Publication 535, the seller cannot have actual or constructive receipt of the exchange proceeds at any point — if the QI fails and the proceeds are lost, the gain is recognized in the year of sale.

What Is a Qualified Intermediary and Why Does It Matter?

A Qualified Intermediary (QI) is an independent third party who holds the exchange proceeds between the sale of the relinquished property and the purchase of the replacement property. The QI is required by IRC § 1031 — the seller cannot receive, pledge, borrow against, or otherwise have constructive receipt of the exchange proceeds. If the seller touches the money at any point, the exchange fails and the full gain is recognized in the year of sale.

The QI is not regulated by a federal agency. There is no licensing requirement, no minimum capital requirement, and no federal insurance for exchange proceeds. QI failures — through insolvency, fraud, or mismanagement — have resulted in significant losses for exchangors. Choosing a reputable, financially sound QI is essential.

What Should You Look for in a QI?

Fidelity bond and errors and omissions (E&O) insurance. A reputable QI carries a fidelity bond (protecting against employee dishonesty and theft) and E&O insurance (protecting against professional errors). Ask for certificates of insurance and confirm the coverage amounts are adequate for your exchange proceeds.

Segregated exchange accounts. The QI should hold exchange proceeds in accounts segregated from the QI's operating funds — not commingled. Commingled funds are at risk if the QI becomes insolvent. Ask specifically whether your proceeds will be held in a segregated, qualified escrow account.

Experience with mineral interest exchanges. Mineral interest exchanges have specific characteristics — title examination timelines, deed conveyance requirements, division order processes — that differ from real estate exchanges. A QI with experience in mineral interest exchanges understands these characteristics and can help structure the exchange to avoid timeline problems.

Clear fee structure. Ask for a complete fee schedule before signing. QI fees typically range from $750 to $2,500 for a standard exchange. Hidden fees — wire transfer fees, account maintenance fees, early termination fees — can add significantly to the cost.

References. Ask for references from prior mineral interest exchange clients. A reputable QI will provide them.

The 45-day identification deadline and 180-day closing deadline are strict — the IRS does not grant extensions except in federally declared disaster areas. The QI must be engaged before the relinquished property closes. Under Texas Natural Resources Code, the mineral estate is the dominant estate; the deed conveyance for the replacement property must be completed within the 180-day window. Under Texas Estates Code, unestablished heirship is the most common title defect in Comanche and Eastland County acquisitions — begin the title examination before the relinquished property closes. The Texas Comptroller imposes severance tax at 4.6% on oil and 7.5% on gas. Reserve classifications follow SEC Regulation S-X Rule 4-10. Under Texas Property Code § 1.002, mineral interests are real property.

Texas State Royalties works with buyers using 1031 exchange proceeds to acquire replacement mineral interests. Start Your Buyer Search or review our acquisition services.

Key Takeaways

• The QI must be engaged before the relinquished property closes; if the seller has constructive receipt of the exchange proceeds at any point, the exchange fails and the full gain is recognized in the year of sale; verify production history for replacement mineral interests against Texas Railroad Commission (RRC) records before closing
• Require fidelity bond and E&O insurance certificates; confirm proceeds will be held in a segregated qualified escrow account — not commingled with the QI's operating funds
• QI failures have resulted in significant losses; there is no federal licensing requirement or insurance for exchange proceeds — due diligence on the QI is essential
• The 45-day identification and 180-day closing deadlines are strict; the QI must understand mineral interest exchange timelines — title examination in Comanche and Eastland Counties can be extended by unestablished heirship issues under the Texas Estates Code
• The Texas Comptroller imposes severance tax at 4.6% on oil and 7.5% on gas; reserve classifications follow SEC Regulation S-X Rule 4-10
• Under Texas Natural Resources Code, the deed conveyance for the replacement property must be completed within the 180-day window; under Texas Property Code § 1.002, mineral interests are real property conveyed by deed
• Ask for references from prior mineral interest exchange clients and a complete fee schedule before signing — hidden fees can add significantly to the cost

Frequently Asked Questions

Can my attorney or accountant serve as the QI?

No. The QI must be an independent third party. The IRS specifically excludes the taxpayer's attorney, accountant, investment banker, real estate broker, and any party who has had a financial relationship with the taxpayer within the prior two years from serving as QI. Using a disqualified person as QI invalidates the exchange.

What happens if the QI becomes insolvent during my exchange?

If the QI becomes insolvent and the exchange proceeds are lost, the gain is recognized in the year of sale — the exchange fails. This is why segregated accounts and fidelity bond coverage are essential. Some QIs offer additional protection through qualified trust accounts or letters of credit. Ask specifically about insolvency protection before signing.

How do I know if the QI has experience with mineral interest exchanges?

Ask directly: how many mineral interest exchanges have you facilitated in the past two years? What is your process for managing the 45-day identification and 180-day closing deadlines for mineral interests? Do you understand the title examination and deed conveyance process for Texas mineral interests? A QI with genuine experience will answer these questions specifically.

About the Author

Richard Partin is the Managing Member of Texas State Royalties, a Fort Worth-based, buyer-first firm that sources producing oil and gas mineral interests through established industry relationships. He holds a degree from the University of Texas at Arlington and has years of hands-on experience in oil and gas acreage interests, working interests, and capital formation across active Texas producing regions.

Texas State Royalties facilitates mineral-interest acquisitions and works exclusively with buyers. Information is for educational purposes only and is not legal, tax, or investment advice. Buyers should consult qualified legal, tax, and financial advisors before making any acquisition decision.