One of the most common questions we get from potential investors who are contemplating a 1031 exchange is how much the transaction will cost them. Many investors worry that the various charges and fees associated with an exchange will end up making the transaction quite expensive. This includes fees paid to a qualified intermediary (QI), which is required in a 1031 exchange.
The truth is the QI fee structure for 1031 exchanges can vary greatly given that each transaction is unique. Some exchanges are riskier, some are more complex, and asset values vary greatly. Ultimately, the cost of your 1031 exchange depends on the many unique factors involved with your specific situation.
While there is variance in the cost of 1031 exchanges, there are standard QI fees that apply to essentially all 1031 transactions. There are also less common fees that only apply to a small minority of very risky or highly complex exchanges.
As you learn about the fees you’re likely to incur during a 1031 exchange, it’s important to keep in mind that a less expensive transaction is not necessarily the better option. As with most other things, your reward reflects your degree of investment, so choosing a QI that charges you less may not be the wisest choice.
1031 Exchange Set Up Fees and Property Fees
Every QI—experienced and inexperienced—will charge you an initial “set up” or general administrative fee that is used to jumpstart your 1031 exchange transaction. In a way, you can think of this initial fee as the means by which you establish a relationship with your QI.
Most experienced, well-referenced QIs will charge $750 to $1,000 for this set up fee. Typically, this will cover an exchange that involves one relinquished property and one replacement property. Most QIs will charge an additional “per property” fee if your transaction involves multiple relinquished or replacement properties (i.e. a few hundred dollars more per each additional property involved in the transaction). Roughly one-third of your QI fees will go towards the 1031 exchange set up fees and property fees.
Interest Income Fees on 1031 Exchange Funds
Your QI is in charge of managing the funds associated with your 1031 exchange, and consequently, he or she will retain a portion of the interest income generated throughout the term of your transaction. This interest income typically generates about two-thirds of the income QIs earn for each transaction handled.
This may seem a bit excessive or unfair at first glance, but it makes good sense. 1031 exchanges carry risk and the greater the value of the properties, the more risk your QI will incur. The percentage of your interest income your QI receives as compensation represents compensation for the risk (and general workload) incurred throughout your transaction.
Other Transactional Fees Are Charged on a Case-by-Case Basis
These two separate fees—set up and interest income—are the two most common fees associated with 1031 exchanges, and they will be the only fees incurred in many cases. However, depending on the complexity of your situation and your particular QI, you may encounter additional fees as well.
For instance, if your exchange involves complex financing arrangements—then your QI may add an extra fee to compensate for the additional time required to complete the transaction. You may also incur wire transfer fees, delivery fees, and document copy fees. These transactional fees will typically make up a smaller percentage of the overall fee structure of your exchange.
On the whole, the QI fee structure for a typical 1031 exchange is quite reasonable considering the risk involved and also the substantial benefit of deferring your tax liability.
Reverse 1031 exchanges where one purchases the replacement property first are much more costly than forward 1031 exchanges, but also have benefits to the taxpayer.
CWS Capital Partners has over 30 years of experience with 1031 exchanges and is capable of walking you through the entire exchange process from start to finish. Our professionals can help you to determine the fees that you’re likely to incur before you begin your transaction, and we can recommend a QI you can trust.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
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