In a 1031 exchange, what is the role of the Qualified Intermediary (QI) and why can't the investor touch the sale proceeds?

IRS regulations require that the investor never have actual or constructive receipt of the sale proceeds during a 1031 exchange. The Qualified Intermediary (also called an exchange accommodator) takes legal possession of the funds from the sale of the relinquished property, holds them in a separate escrow or trust account, and uses them to purchase the replacement property. Using a QI is not optional in most cases because any direct access to funds by the investor triggers immediate tax recognition on the entire gain. Choosing a reputable QI matters because QI funds are generally not FDIC-insured and there have been cases of QI fraud and insolvency.