Tax rules require that a taxpayer enlist the assistance of a Qualified Intermediary (QI) for their 1031 transaction. The QI will fill two roles in the transaction. First, they will prepare documents before the sale of the relinquished property and they will also document the replacement property closings. Second, the QI will hold the funds on behalf of the client during the exchange. The QI will disburse funds for the acquisition of the replacement property and if there is a balance after the purchase, the QI will return the unused funds to the taxpayer at the end of the exchange period.

The 1031 Exchange, also known as a tax-deferred exchange, comes from IRC section 1031, which was written back in 1921. This tax code allows taxpayers to exchange property held for business use or investment purposes for other like-kind property. As long as the taxpayer meets the necessary requirements, the taxpayer will not recognize the gain from the sale of the asset.