For an exchange to be successful, you cannot take possession of the funds from the sale of the relinquished property or the title to the replacement property until the end of the transaction. You must give up your rights to access the proceeds until after the exchange is complete. Those rules are impossible to follow for an individual working alone. The solution is to hire a qualified intermediary, a person or firm that acts as a buffer between you, the proceeds, and the other parties involved in the sale.

The qualified intermediary cannot be related to you. The intermediary cannot be someone who has been your employee, attorney, accountant, investment banker or broker, or real-estate agent or broker within the two-year period before the transfer of the property you give up.

A real-estate or tax attorney can usually help you find a qualified intermediary. Title insurance companies sometimes provide the service or will help you locate a company that does. The intermediary will charge a fee for its services, so be sure to get the facts about costs before you sign a contract.

It's a good idea to compare the services, costs, and references of several qualified intermediaries before selecting one to handle your 1031 exchange. Be sure to ask potential intermediaries for references and find out who audits their work. Also ask how disbursements are handled — funds should not leave your account without your approval or the approval of your attorney.

Be sure to request a step-by-step explanation of the entire exchange process and ask as many questions as it takes for you to feel comfortable with the company's ability to complete a successful transaction and handle your proceeds with care.

The Written Agreement

You must have a written agreement with an intermediary before you close on the relinquished property. The agreement will cover many topics and give the intermediary the power to do the following:

• Sell the relinquished property and deed it to the buyer.

• Take possession of the proceeds from the sale.

• Hold the proceeds until it's time to close on the replacement property.

• Use the proceeds to purchase the replacement property and arrange for it to be deeded to you.