A more thorough explanation:

A qualified intermediary is a person who helps property owners defer their capital gains on taxable proceeds from the sale of their property. This person enters into a written agreement with the taxpayer and acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer.

Under 26 U.S. Code § 1031, property owners can defer their capital gains on taxable proceeds from the sale of their property if the proceeds are subsequently used to purchase property of like kind. However, property owners can only take advantage of this tax-deferral benefit if they do not receive the proceeds of the sale. In a 1031 exchange, property owners may use a qualified intermediary as a safe harbor to ensure they comply with the relevant tax code but must expressly agree to limit their “rights to receive, pledge, borrow or otherwise obtain benefits of money or other property held by the qualified intermediary.”

For example, if a property owner sells a commercial property for $1 million and wants to use the proceeds to buy another commercial property, they can use a qualified intermediary to hold the proceeds and purchase the replacement property. The qualified intermediary will then transfer the replacement property to the property owner, and the property owner can defer their capital gains taxes.

One illustrative case law is Teruya Bros., Ltd. v. C.I.R., 580 F.3d 1038 (9th Cir. 2009). In this case, the court held that the property owner did not comply with the requirements of a 1031 exchange because they had control over the funds held by the qualified intermediary. This case illustrates the importance of property owners agreeing to limit their rights to receive, pledge, borrow, or otherwise obtain benefits of money or other property held by the qualified intermediary.