To understand what security measures should be in place for safeguarding exchange funds, it’s essential to first grasp the structure of a valid 1031 exchange. While there are several factors that go into a successful 1031 exchange, though not the primary function of a Qualified Intermediary (QI), an important part of this process is the use of a QI, who as part of its role ensures the Exchanger never takes actual or constructive receipt of the proceeds from the sale of the Relinquished Property. Accordingly, the QI temporarily holds those funds until needed and later transfers them for the acquisition of the Replacement Property. This legal separation keeps the transaction compliant with IRS regulations and preserves the tax-deferred status of the exchange.
Given that the funds held by a QI during a 1031 exchange can range from modest amounts to multi-million-dollar sums in some large transactions, ensuring a QI has robust safety and security measures in place is crucial. Clients must have the same level of trust in the QI facilitating a 1031 exchange as they would in any financial institution managing significant assets. The safety and security of exchange funds should be upheld through a combination of institutional insurance coverage, strict banking protocols, rigorous wire transfer procedures, and in-depth fraud prevention. Thorough security measures are designed to protect client assets from fraud, mismanagement, and operational risk. When validating a QI and their safeguards take into account the following considerations.
Institutional coverage and liability protections – Does the QI have the proper insurance policies and safeguards in place?
One of the main check points should be that the Qualified Intermediary carries comprehensive institutional insurance and liability protections, including:
- A substantial fidelity bond to guard against risk of financial loss from internal fraud or theft.
- Robust errors and omissions coverage for professional mistakes.
- Cyber liability insurance to cover data breaches and ransomware events.
These policies should have high limits that match the scale of client assets under management and be supported by clear policy terms, named insureds, and claims procedures. The QI should regularly review and update coverage with external advisors, obtain proof of insurance and endorsements on request, and maintain contractual safeguards that allocate responsibility and preserve client recovery rights. These regular independent audits and documented risk-transfer mechanisms ensure the insurance program and contractual protections function effectively when they are needed.
Accruit is proud to maintain some of the highest coverages in the industry, including a $50 million Fidelity Bond, $25 million Errors & Omissions, and $20 million Cyber Liability policy.
Banking and account structure – Where are funds being held and how is the account prepared?
The Exchange Funds should be placed with FDIC‑insured, highly rated depository bank. These banks undergo quarterly evaluations and compliance reviews to keep partners accountable and aligned with regulatory and operational expectations. The funds held inside the bank should be held in segregated, client‑specific accounts to prevent commingling with other clients or the provider’s operating assets, preserving legal separation and simplifying audits. Client accounts should be structured for immediate liquidity, so funds are available at the client directions for earnest money payments and timely acquisition of the Replacement Property.
Accruit prides itself on using only 4-5 Baur rated banks which are evaluated quarterly via Bauerfinancial.com. All funds are held in segregated bank accounts and never commingled with Accruit’s or other Exchangers funds. The FDIC ensures up to $250,000 per Exchanger. Learn more about Accruit’s Safety and Security of Funds.
Transaction and wire protocols – What is the best way to ensure the transfer of funds is safe?
When it comes to the actual transferring of funds, wire transfer is standard protocol with large sums of money. As with any wire transfer the QI should have safety procedures in place, including verbal confirmation of outgoing wires with the beneficiary. These protocols reduce the risk of redirected-fund fraud by validating payment before release. Another touch point during the wire transfer is confirmation of received funds within 24 hours, this acts as another checkpoint for error detection. The last step of wire transfer protection is dual authorization for outgoing wires, separating posting and approving functions, preventing internal fraud or other unintentional errors.
Our bank wire protocol at Accruit has three core check points.
- All outgoing wire instructions are verbally confirmed by a member of our Finance team with the beneficiary.
- Receipt of funds is verbally confirmed by a member of the Finance team with the beneficiary within 24 hours of initial wire.
- Dual authorization is used to process outgoing wires and ACH payments (posting & approving).
Account access and fraud prevention controls – What is the QI doing to ensure proper fraud prevention?
Fraud prevention is essential in any interaction that contains data and money. The QI facilitating the 1031 exchange should understand the potential dangers of cybercriminals and have security and training around prevention of these crimes. Some steps that are fundamental in cybersecurity around exchange funds include:
- Multi-factor authentication for bank access prevents unauthorized logins even if credentials are compromised.
- Positive Pay for checks prevents payment of fraudulent or altered checks by matching issued check details against presented items.
- ACH Debit Blocks stop unauthorized electronic debits from being pulled from client accounts.
- Restricted account permissions and role-based access within the provider’s finance systems limit who can initiate, approve, and view sensitive transactions.
Our Team at Accruit is highly trained in fraud prevention including mandatory yearly security training, using accounts secured with Positive Pay, and requiring multi-factor authentication through the depository banks.
When utilizing a Qualified Intermediary (QI) for your 1031 exchange, transparency around the safety and security of your exchange funds should be non-negotiable. Because the QI holds and manages these funds, it’s essential to verify that they follow these comprehensive safeguards.
Confirm the presence of robust insurance and liability protections, such as a substantial fidelity bond and high-limit cyber liability policies. Review the banking structure, ensure the bank(s) is FDIC-insured and that exchange accounts are segregated and designed for immediate liquidity. Wire transfer protocols should include verbal confirmations, dual authorization, and multiple checkpoints to prevent fraud or errors. Additionally, look for comprehensive fraud prevention measures like multi-factor authentication (MFA), Positive Pay, ACH debit blocks, and restricted account access. Don’t hesitate to request detailed information and documentation, verifying these protections is a reasonable and responsible step when entrusting a QI with your 1031 exchange.
At Accruit our clients’ trust is a top priority, and we aim to ensure your funds and exchange are safe, secure, and simple. While we work with all types of exchanges and clients we ensure our security and safety are set for the highest level of exchange.