While a 1031 exchange offers the average real estate investor several long-term benefits, the costs of doing a 1031 exchange must be considered. Like any other business transaction, the average costs of a 1031 exchange vary depending on the exchange company, number of properties, and even the location of the properties.
The average costs of doing a 1031 exchange are usually around $600 to $1,200, with most of the expenses in the form of fees paid to a Qualified Intermediary. This cost is for a straightforward deferred exchange, where you sell your relinquished property and acquire a replacement property. More complicated 1031 exchange types may include hidden fees and cost more.
When comparing 1031 exchange fees charged by qualified intermediaries or exchange companies, you must know the following fees:
- Set-up or administrative fees
- Per property charges
- Interest income paid to you (the investor/exchanger)
- Interest income retained by the Qualified Intermediary
- Transactional or service fees (wire transfers fees, check disbursement fees, etc.)
- Fees or service charges for Qualified Trust Accounts
If you are considering a DST or 1031 exchange investment and would like to see the difference between “what’s it going to cost” utilizing our services vs. that of our commission-driven competition, schedule a free 30-minute consultation. We will give you a breakdown of all the costs associated with doing a 1031 exchange and DST from our end.
How Much Does a 1031 Exchange Cost?
When doing a 1031 exchange, most of the expenses you will encounter are usually in the form of fees paid to your qualified intermediary. On average, expect to spend around $600 to $1,200 in total exchange fees. More importantly, you may have to account for specific incidental fees like an overnight delivery charge.
Please note that the more complex or extensive the 1031 exchange process is, the more money you will have to spend on exchange costs and fees.
Qualified Intermediary Fees
Since Qualified Intermediaries play most of the roles in a 1031 exchange, they tend to receive a greater portion of the fees. It is common for QI’s to earn two-third of their income from realized interest on exchange funds. The average cost to accommodate a typical Delayed Exchange ranges from $750-$1,250.
These fees cover the qualifying, accommodation, and administrative work of the 1031 exchange. Most QI’s will charge an extra $300-$400 for each additional property in the exchange. Others will charge based on the price of the properties but expect the fee to fall within the above price range.
In addition, the majority of QI revenue comes from interest generated on the exchange fund. A 1031 exchange requires that a QI holds the proceeds from the sale of the relinquished property until you buy the replacement property. In the meantime, the held-up funds generate interest in a deposit account or money market. And the QI keeps some or all of this money.
Expect some QI’s to request fees covering transactional costs, especially if the exchange is complex or involves multiple properties. QI’s handling construction and reverse exchange tend to charge a couple of hundreds of dollars for transaction costs.
1031 Exchange Cost – 1031 Exchange Allowable Expenses
A typical 1031 exchange comprises several expenses to make the exchange process possible. While these expenses are an essential part of the exchange process, certain closing costs expenses paid out of the sales or 1031 exchange proceeds will result or not result in a taxable event for the exchanger.
Below are the typical allowable closing costs in a 1031 exchange and their cost assigning metrics:
|Allowable Closing Costs/Expenses||Average Cost Assigning Metrics|
|Appraisal for purchase contract||Around $5,000 depending on building size|
|Attorney Fees||Flat fee of couple of hundreds to thousands|
|Brokers Commission||Often 4-8% of the total property value|
|Escrow Fee||Often 1-2% of the total property value|
|Transfer Taxes||Often 1-3% of the total property value|
|Inspection Fee||Often $0.1 per square foot|
|Prorate Taxes||Up to 110% of last known county bill|
|Recording Fee||Average $200 but may run into thousands|
|Title Insurance||Starts at 1% of the property value|
|Loan Acquisition Fee for New Property||Varies depending on the exchange company|
You can read more about 1031 exchange allowable and non-allowable closing costs expenses.
Are 1031 Exchange Fee Tax Deductible?
Yes, several 1031 exchange fees are tax-deductible or do not trigger a taxable event to the investor. 1031 exchange fees such as broker commissions or title closing fees will not create a tax liability.
We Can Help
Sera Capital always recommends that the taxpayer consult their tax or legal counsel on all matters dealing with the Internal Revenue Service. We look forward to working with you on your next Section 1031 exchange at a flat fee. To answer any of your questions regarding the low cost to file a 1031 exchange, don’t hesitate to get in touch with us today.