"I would rather my own attorney held the money. I have known him fifteen years."
It is an entirely reasonable instinct and it is the one thing he could not do. The closeness that makes somebody trustworthy is, in this context, exactly what disqualifies them.
Why the rules work this way
The whole structure depends on you not having access to the proceeds. An intermediary is permitted to hold your money precisely because they are independent of you, and the rules protect that independence by naming categories of people who are treated as too close to count.
If a disqualified person holds the funds, the arrangement does not do what it was supposed to do, and you may be treated as having received the proceeds yourself.
Who is caught
Broadly, two groups.
People related to you, under the family and controlled-entity rules that also govern related party exchanges. Siblings, spouses, ancestors, descendants, and entities in which you hold a large enough interest.
People who have acted as your agent, which is where owners get caught. The test looks back two years from the transfer and generally reaches anyone who has served as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker in that period.
That sweeps in most of the professionals around a typical transaction. Your longtime attorney. The CPA who prepares your returns. The broker who leased your building last year.
| Candidate | Generally usable as intermediary |
|---|---|
| Your attorney of fifteen years | No |
| Your CPA | No |
| The broker who listed the property | No |
| A relative | No |
| An independent intermediary firm | Yes |
| A firm that has only ever done 1031 work for you | Generally yes |
That last row matters. Services performed for you with respect to exchanges intended to qualify under Section 1031 are generally disregarded when applying the two-year test, which is why a specialist firm you have used repeatedly is not disqualified by that history. Routine title, escrow and financial services are treated similarly.
It is not only about holding the money
The same concept reaches the identification notice. A written identification has to be delivered to the intermediary or to another person involved in the exchange who is not a disqualified person, which is why delivering it to your own attorney or agent generally does not count. We set that out in revoking and re-identifying, and it is one of the more common ways a technically perfect identification fails.
What to do about it
- Ask the question early, because it determines who you can appoint and the appointment has to happen before the relinquished property closes.
- Do not appoint someone to be helpful. An attorney offering to hold funds as a favor is offering to undo your exchange.
- Keep your advisers in their roles. Your attorney should review the exchange documents. Your CPA should model the numbers and file the return. Neither should be the intermediary.
- Check who receives the identification, not only who drafted it.
- Be careful with new relationships too. A firm that also acts as your general counsel is not independent merely because the 1031 work is in a separate department.
None of this reflects on anybody's competence or integrity. It is a structural rule about independence, and it is one of the few places where the obvious answer is reliably the wrong one. Appointing the right intermediary is the first step in our exchange process, and your attorney should confirm the analysis for your particular relationships.
Common questions about disqualified persons
Can my attorney act as my qualified intermediary?
Generally no. Someone who has acted as your attorney within the two years before the transfer is usually a disqualified person.
Does the two-year rule catch my CPA?
Usually, if they have provided services to you in that period. Work performed specifically on 1031 exchanges is generally disregarded for this test.
Can a relative hold the funds?
No. Family and controlled-entity relationships are caught by the same concept that governs related party exchanges.
Who can receive my identification notice?
The intermediary, or another party to the exchange who is not a disqualified person. Sending it to your own agent or attorney generally does not satisfy the requirement.
Does using the same intermediary repeatedly disqualify them?
No. Services performed for you with respect to qualifying exchanges are generally disregarded in applying the two-year test.
Disclosure: Numerical example is for illustration purposes only; individual circumstances will vary.