Do I need a qualified intermediary for a section 1033 exchange?

A qualified intermediary solves a problem that section 1033 does not have

In a deferred 1031 exchange, the moment you actually or constructively receive the sale proceeds the exchange fails, which is why the money is routed to a qualified intermediary under the safe harbor in Reg. section 1.1031(k)-1(g). The intermediary exists to keep cash out of your hands for up to 180 days.

Section 1033 starts from the opposite premise. Section 1033(a)(2) is headed "conversion into money", and Reg. section 1.1033(a)-1 says the proceeds "must (within the time limits specified)" be reinvested in similar property to avoid recognition. Nothing in the statute or the regulation says who holds the proceeds in the meantime.

So the question is not which intermediary to hire but how to document a purchase. If you want a refresher on what the intermediary does in a conventional exchange, the qualified intermediary requirements and whether you need one to buy a DST interest are the 1031-side pages.

You may hold the award, and you are not even required to spend those particular dollars

Publication 544 puts it plainly: "You do not have to use the actual funds from the condemnation award" to buy the replacement, although you "must buy replacement property for the specific purpose of replacing your condemned property". The award can sit in your operating account while a loan funds the purchase, and the deferral still works, because the test in section 1033(a)(2)(A) compares the amount realized with the cost of what you buy, not with where the cash came from.

Two things do count against you. Publication 544 says amounts the government pays directly to the holder of a mortgage or lien "are part of your award", so a $900,000 taking with $300,000 sent to your lender still leaves $900,000 to be matched by replacement cost. And property you acquire by gift or inheritance "does not qualify as replacement property", so a parcel a parent deeds to you cannot absorb the award.

Interest the authority pays for a slow settlement "is not part of the condemnation award" under Publication 544; it is ordinary income, reported separately, and neither raises the reinvestment target nor qualifies for deferral.

What replaces the intermediary's paperwork is your own return

Under Reg. section 1.1033(a)-2(c)(2) the election is made by leaving the gain out of income for the year it is realized and reporting the details of the conversion on that return. If you buy the replacement in a later year, the details of the purchase go on that later year's return. There is no exchange agreement, no identification letter and no Form 8824; reporting a condemnation under section 1033 walks through the forms.

The discipline the intermediary would have imposed is replaced by an open statute of limitations. Section 1033(a)(2)(C) keeps the assessment period for the deferred gain open until three years after you notify the IRS that you have replaced, or that you will not, so keep the award letter, the replacement closing statement and the election statement in one file.

If the plan changes, the regulation expects an amended return or a refund claim rather than a failed exchange; electing section 1033 on an amended return covers both directions.

Two situations where an intermediary still belongs in the file

The first is a negotiated sale under threat of condemnation that you would rather run as a 1031 exchange, usually because you want to buy something that fails the section 1033 replacement standard or because a casualty rather than a condemnation means the narrower similar-use test applies. A sale under threat is still a sale, and if you want section 1031 treatment the proceeds must go to an intermediary at closing. You cannot take the money, change your mind and route it to an intermediary later.

The second is a partial taking where you then sell the untaken remainder to a private buyer. That second sale is voluntary, so deferring its gain needs an ordinary exchange with an intermediary and the 45-day and 180-day clocks. Publication 544 carves out one exception: a voluntary sale of property that formed "one economic unit" with the condemned property can be treated as part of the involuntary conversion if you show the condemned part "could not reasonably or adequately be replaced". Where that applies, no intermediary is needed for the remainder either.

A court deposit or an escrow set up by the condemning authority is not an intermediary arrangement and does not need to be; it affects when gain is realized, not whether the deferral survives.

• Taking under threat, happy with like-kind real property: no intermediary, hold the award, buy within three years.
• Taking under threat, but the replacement you want fails section 1033: decide before closing and send the proceeds to an intermediary for a 1031.
• Remainder sold voluntarily to a private buyer: that sale is a 1031 and needs an intermediary unless the one-economic-unit rule applies.

Where a DST fits once there is no intermediary in the chain

Because you hold the money, a DST subscription after a condemnation is a wire from your account on the trust's closing date rather than a direction to an intermediary. The constraint is the trust: an offering closes when its equity is raised, the interest is illiquid, and the equity can be lost if the property underperforms.

Whether a beneficial interest in a Delaware Statutory Trust is replacement property under section 1033 at all is a question no ruling, regulation or opinion answers. Putting 1033 proceeds into a DST lays out the reasoning on each side; take the question to your tax counsel before you subscribe, and do not treat the absence of an intermediary as a sign that the rest of the analysis is relaxed.