How Much Does a 1031 Exchange Cost?

Last updated on June 23rd, 2021 at 02:24 pm

1031 exchange costs by company | 1031 qualified intermediary fees | How do qualified intermediaries make money? | Reverse 1031 exchange cost | Build to suit 1031 cost | Simultaneous 1031 exchange cost | How much should cost matter?

The average cost of a standard deferred 1031 exchange is around $1,000.

This covers the basic administrative work involved with an exchange, which can include document prep, notary and messenger fees, and general processing.

The standard fee usually includes one relinquished property, which is the property being sold, and one replacement property. 

Each additional property in a 1031 exchange adds another $300-$400 to the total.

The table below shows the price ranges leading 1031 intermediaries charge for their services.

1031 exchange costs by leading companies

CompanyWhy should you choose them?Base feeFee for additional properties
First American ExchangeIndustry leader, offers financial banking$1,000$250
1031xInnovative, flexible, easy to use, offers personalized service $1,000$350
Old Republic ExchangeNational presence, experience with high value exchanges$950$575
1031 Corp.East coast specialization, especially Pennsylvania $1,250 (up to $1 million relinquished property value; fees increase above $1 million)$300
Starker Services, Inc.Extensive 1031 experience, deep industry network$750 (plus $100 bank fee)$250
IPX 1031National presence; they don’t take interest income$1,200$200
Exeter 1031Help with complex transactions, 24/7 support$899$300
Asset Preservation, Inc.Offers letter of assurance, backed by Stewart Title$1,000$200

Who gets paid in a 1031 exchange?

When executing a 1031 exchange, you’re paying for a qualified intermediary (QI).

In a standard delayed 1031 exchange, the qualified intermediary is a third party who receives the proceeds from the sale of your relinquished property, uses those funds to purchase your replacement property, and then transfers the title to you.

Qualified intermediaries are either institutional (part of a bank or title company) or non-institutional (independent businesses who specialize in 1031 exchanges). Each type has its  advantages and disadvantages, which we’ll touch on below.

A qualified intermediary is necessary because, according to U.S. tax law, the investor doing a 1031 exchange can’t receive or even control the funds from the initial sale, nor can they hold the titles of both properties at the same time. If they do, even for an hour, the 1031 exchange is invalid. The investor will have to pay the full amount of capital gains taxes on the sale of the relinquished property.

Because the qualified intermediary holds onto your money, and uses it to buy your next investment property, it’s important to choose the right QI. 

The best way to do that? Consult with industry professionals. Contact us now for a free, no obligation consultation.

What are 1031 qualified intermediary fees?

The numbers quoted above are for a basic deferred 1031 exchange, but your costs can increase if you need additional services. Let’s look at some typical added 1031 exchange fees.

1031 exchange serviceDescription of service1031 exchange extra fees
Additional propertiesIf you need to bring additional properties into the 1031 exchange, you’ll have to pay a fee for each property you add.$300-$400 per property
Administrative/setup workGood news: The basic setup of your 1031 exchange is included in your base fee. This also includes all required administrative work.Included in base fee
Managing properties of varying valuesSome qualified intermediaries charge slightly more for more expensive properties.The base fee should be under $2,000, for even the most expensive property.
Opening a qualified trust or escrow accountA qualified trust or escrow account gives your money an added layer of security while it’s being held by your qualified intermediary. Generally, the cost of holding your money in a qualified escrow account is in the QI’s base fee. Some QIs will charge an additional fee.$200-$300, if not included in base fee
Rush feesBecause 1031 exchanges come with strict deadlines, investors may need to rush. Qualified intermediaries usually charge extra for this, since it may require overtime and extra costs like overnight mail fees.$200-$400

How do qualified intermediaries make money?

If the fees above seem low, that’s because qualified intermediaries (QIs) only make about a third of their income on each exchange from the associated fees.

The other two-thirds comes from interest income.

How does a qualified intermediary earn income from interest?

A 1031 exchange can take up to 180 days, and your QI will have your sale proceeds for the duration of your exchange. 

Your money earns interest while it sits in an escrow account, and your qualified intermediary will take some — or all — of that interest income as part of their fee. 

How much of this interest your QI keeps, and how much you receive, varies according to the terms of your agreement. As a general rule, institutional QIs (like those associated with a bank or title company) charge higher up-front setup fees and take a smaller portion of the interest income. Non-institutional QIs generally charge lower up-front setup fees, but take a larger portion of the interest income.

How much money is at stake? 

Well, if you put $1 million in proceeds from your initial sale into an escrow account for the full 180-day exchange period, and it earns interest at a rate of 2%, you’re looking at around $10,000.

Always ask about your interest income split, and run the numbers before you commit to a qualified intermediary.

Also keep in mind that if your qualified intermediary doesn’t have a policy of keeping your funds in an escrow account, they may use your funds on their own investments during your 180-day exchange period. 

All investments come with some degree of risk, so if you decide to work with a QI who won’t escrow your money, make sure the company is financially stable, healthy, and reputable.

Always consult with a 1031 exchange expert before you decide on a qualified intermediary. Each situation is unique, and calls for a unique approach. Contact us today for a free, no obligation consultation, and we’ll help you chart the best path forward.

How much does a reverse 1031 exchange cost?

Reverse 1031 exchanges generally cost between $3,000-$8,000.

Why so much more than a standard exchange? In a reverse exchange, you buy your replacement property before you sell your relinquished property.

That means there aren’t any funds for the QI to hold during the exchange. Since they typically get two-thirds of their profit from interest on those funds, they’re taking a big pay cut by doing a reverse exchange. They have to make up that money by charging a larger up-front fee.

In addition, a reverse 1031 exchange is more complex than a standard deferred exchange, and requires the use of an exchange accommodation titleholder (EAT) — a kind of intermediary who holds onto the title of your property during the exchange, similar to how a standard QI holds your funds during a standard exchange. 

An exchange accommodation titleholder costs money, and  comes with more paperwork, too, as they have to file a separate tax return. 

» MORE: For an example and more details about reverse 1031 exchanges, read What is a Reverse 1031 Exchange?

How much does a build to suit 1031 exchange cost?

Build to suit 1031 exchange (also called a construction 1031 or an improvement 1031) costs vary depending on the value of the property and the type of work being done. Their costs are generally in line with a higher-priced reverse 1031 exchange than with a standard deferred 1031 exchange. 

A build to suit 1031 exchange is when an investor sells their relinquished property, and then uses the funds to purchase and make improvements to a replacement property, so that its post-construction value is equal to the relinquished property’s value.

Why is a build to suit 1031 exchange so expensive? Well, it involves a lot of administration; you’ll have to use an exchange accommodation titleholder (EAT) to hold the title of your replacement property while the construction is being done, and the contractors will invoice the EAT for the cost of the work. It all generates a lot of paperwork. 

Construction has to be completed during the 180-day exchange period, which can be tough if you run into problems or delays. And the fact that, similar to a reverse 1031 exchange, there will be two real estate transfers between you and the EAT can add a lot of costs to the transaction.

» MORE: For an example and more details, read What Is an Improvement 1031 Exchange? 

How much does a simultaneous 1031 exchange cost?

A simultaneous 1031 exchange is a straight-up trade of properties. It’s rare, due to the difficulties coordinating the timing of two closings for two properties that are similarly priced. 

However, if the stars align, all you’d need is barebones assistance from a qualified intermediary, for which you’d pay $600-$1,000.

How much should cost really matter when it comes to a qualified intermediary?

A 1031 exchange is all about maximizing your profits, so it’s disingenuous to say that cost shouldn’t matter when it comes to picking out a qualified intermediary.

That said, cost shouldn’t be your highest priority. If you decide to go with the qualified intermediary with the lowest fee, and your 1031 exchange turns out to be invalid because your QI failed to properly handle their end, your capital gains tax bill will dwarf any money you might have saved.

When it comes to a QI, experience, security, and expertise are as important as cost. You want a QI who’s experienced handling exchanges similar to yours, one who has safeguards in place to protect your money, and one who intimately understands how 1031 exchanges work. 

So how do you ensure your QI meets those standards? Ask them the right questions. Try these nine:  

1. Are you properly certified?

Your qualified intermediary should have a certificate from the Federation of Exchange Accommodators (FEA) that authorizes them to act as a Certified Exchange Specialist.

2. Do you have bonds to protect my money?

Your qualified intermediary should have fidelity or surety bonds to cover the exchange if funds can’t be recovered due to fraud or theft — or if your QI declares bankruptcy during your exchange.

3. Do you have insurance to cover mistakes on your part?

Make sure your qualified intermediary has errors and omission coverage to cover any claims or lawsuits related to negligence or mistakes.

4. How much experience do you have with 1031 exchanges?

You want to see a proven track record. A good general rule is more than 10 years of industry experience.

5. Will my money be commingled with the money of other clients?

You want your money held in a separate account, either in a qualified trust account or a qualified escrow account. This protects against fraud, embezzlement, or mishaps. 

The only way money can be moved out of these accounts is with the signatures of you and your qualified intermediary.

6. Do you have experience with situations similar to mine?

There are many types of 1031 exchanges, and some are more complicated than others. If you’re undertaking a complex reverse improvement exchange, for example, you want a qualified intermediary with experience handling that specific type of deal.

7. How much interest income do you keep?

Your money will be earning interest while the qualified intermediary holds onto it. It’s fair to ask if they keep all of that money, or if they’re amenable to a split. 

Keep in mind that intermediaries earn about two-thirds of their income from interest, so they’re likely planning on keeping some of it.

Generally, the less they charge upfront the more interest income they’ll want to keep, and vice versa.

8. Can you provide a written copy of your internal controls?

Even if your qualified intermediary says all the right things about escrow accounts, insurance, and fidelity bonds, you should ask for a written copy of their controls and policies. If they can’t provide one, be cautious.

9. How do you price your services? Are there additional fees?

A reputable qualified intermediary will be open, honest, and transparent about fees. If you interview a QI who’s evasive or vague about prices, even after you ask for specific numbers, be cautious.

It can be tough to find the best qualified intermediary for your unique circumstances. That’s why you should consult with an industry professional, so they can match you with a QI who meets your needs. 

Contact us today for a free, no obligation consultation, and get started down the path to a successful 1031 exchange.

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