The short answer
Two clauses are legally required. Reg. section 1.1031(k)-1(g)(4)(iii) needs a written agreement under which the intermediary acquires and transfers both properties, and paragraph (g)(4)(ii) needs it to 'expressly limit' your rights to the money as paragraph (g)(6) provides. Everything else is commercial: how the funds are held and invested, who keeps the earnings, the fee, indemnities and termination. Check that the release events match the regulation word for word, that the fee is fixed before your sale closes, and that the account is in your name or a qualified escrow.
At a glance
| Required clause 1 | The intermediary acquires and transfers the properties, usually by assignment |
|---|---|
| Required clause 2 | No right to receive, pledge, borrow or benefit from the funds before the end of the exchange period |
| Permitted early release | Nothing identified by day 45, all property received, or a written contingency |
| Earnings | Taxed to you if all are paid to you; otherwise treated as a loan to the QI |
| Fee clause | Fixed by the sale date and payable regardless of earnings |
| Termination rights | State-law rights to fire the QI do not break the safe harbor |
The regulation requires the intermediary's role and a lock on the money, nothing more
The intermediary's role is set by paragraph (g)(4)(iii)(B): it 'enters into a written agreement with the taxpayer' and, as that agreement requires, acquires the relinquished property, transfers it, acquires the replacement and transfers it to you. In practice it does all four by assignment of your contracts with written notice, so look for an assignment clause that covers the sale contract and every later purchase contract.
The lock is paragraph (g)(6)(i). The agreement must provide that you have 'no rights, except as provided in paragraph (g)(6)(ii) and (g)(6)(iii)', to 'receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period'. Without that sentence the safe harbor in paragraph (g)(4)(i) does not apply, and the intermediary's possession may be treated as yours.
Read the release events closely, because they decide when you can get leftover money
Paragraph (g)(6)(ii) allows release after day 45 if you identified nothing. Paragraph (g)(6)(iii) allows release, if you identified property, after you receive 'all of the replacement property to which the taxpayer is entitled under the exchange agreement', or after a 'material and substantial contingency' that relates to the exchange, is 'provided for in writing', and is beyond your control.
Two drafting points follow. If the agreement defines your entitlement as every identified property, money cannot be released until all of them close or the period ends. And a contingency that is not written into the agreement cannot be used later. Ask how the agreement handles an identified property that falls through after day 45; the payout timing is covered in when the QI releases my money.
Worked example: $100,000 left after one of two purchases
Hypothetical, round numbers; run your own numbers with your CPA. The intermediary holds $700,000. You identify two properties and on day 100 buy the first for $600,000. On day 120 the second seller backs out.
If the agreement lists a seller's failure to close as a written contingency, the remaining $100,000 can be released once that happens. If it does not, you wait until day 180. Either way the $100,000 is boot taxed in the year of the sale, as explained in leftover cash after a 1031 exchange; the clause only changes when the cash arrives.
The money clauses decide who is taxed on the earnings and what protects the principal
Interest is allowed. Paragraph (g)(5) says a right to interest or a growth factor does not create constructive receipt if the agreement restricts it under paragraph (g)(6), and paragraph (h)(2) treats what you receive as interest income. Reg. section 1.468B-6 then decides whose income it is: if the agreement pays 'all the earnings attributable to a taxpayer's exchange funds' to you, you report them; otherwise the funds are treated as a loan from you to the intermediary.
The same regulation governs the fee. The intermediary's fee counts as a transactional expense only if the agreement fixes it on or before the sale, as a dollar amount or a formula, and makes it payable regardless of whether earnings cover it. More on earnings is in interest on exchange funds, and on fee treatment in are exchange fees deductible or added to basis.
For the principal, look for an account in your name and taxpayer number or a qualified escrow or trust, with withdrawals needing your written authorization. Washington requires a separately identified account in which the client receives all earnings, and California requires a prudent investor standard and bars commingling with operating accounts.
Check the commercial clauses before you sign
Paragraph (g)(4)(vi) says rights you have under state law to 'terminate or dismiss' the intermediary are disregarded, so a termination clause is safe as long as it does not pay the money to you. If you might move the account, see changing intermediaries mid-exchange. A Delaware Statutory Trust subscription is funded under the same assignment clause as a building, so confirm the agreement does not limit replacements to deeded real estate. Have your CPA or attorney read the agreement before closing.
- The parties: the entity that signs must be the same taxpayer that holds title to the property being sold.
- Fees: the base fee, per-property and per-wire charges, and any fee for an early release or an extension.
- Identification: how and to whom your day-45 notice is delivered, and confirmation it may name a DST interest.
- Indemnities: what you promise to cover, and whether the intermediary limits its own liability for lost funds.
- Disputes and notices: governing law, and an email and street address for every notice.
Related questions
Can I negotiate an intermediary's standard agreement?
The paragraph (g)(6) language should not change, but fees, account structure, earnings and indemnities are commercial terms you can ask about.
Does the agreement have to be signed before closing?
Yes. The intermediary must be in place and the contract assigned, with written notice to the buyer, on or before the sale closes.
Can the agreement let me borrow against the funds?
No. A right to pledge or borrow against the money before the exchange period ends is exactly what paragraph (g)(6) forbids; see can I touch or borrow against exchange funds.
Is the identification notice part of the agreement?
It is a separate document you sign and deliver by day 45, though the agreement usually says the intermediary will accept it; see how to identify replacement property.
Who keeps the interest if the agreement is silent?
Under Reg. section 1.468B-6, unless all earnings are paid to you, the funds are treated as a loan to the intermediary, which takes the income into account, subject to the below-market loan rules the regulation cross-references; get the answer in writing either way.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.