How Much Does a 1031 Exchange Cost?
If you are preparing to sell your investment property in the most advantageous way, you are likely aiming for a 1031 Exchange. A 1031 exchange eases the burden of paying taxes on your capital gains by allowing you to sell the property, use the funds to acquire a new one, and essentially shift all of your tax liability to the new property.This loophole is a total win for property investors and their bank accounts. But like most other things, completing a 1031 Exchange doesn’t come for free. So how much does a 1031 Exchange cost?
As emphasized in our comprehensive breakdown of 1031 Exchanges, a 1031 Exchange is a complex process that you can’t complete by yourself. You will need to work with a 1031 Exchange real estate agent to help facilitate the sale, and a qualified intermediary (QI) to set up and make the exchange for you. You also have legal, administration and many other miscellaneous fees. As you might imagine, this will cost you.
Real Estate Agent Fees
If you are ready to make some changes to your investment portfolio, you’ll want an expert on your side. A 1031 Exchange real estate agent will help sell your investment property, which typically includes listing prep, professional marketing, and negotiating incoming offers. Once the sale closes on the relinquished property, the agent will then need to HUSTLE! You have 45 days from the sale of your relinquished property to identify a valid replacement property, and only 180 days to close. In certain cases our team offers an incentive for using us for both the sale and the subsequent purchase.
Learn how to find a great 1031 Exchange Realtor, who can facilitate this whole process. Ideally, you should look for a realtor who has their own portfolio and has completed a 1031 Exchange themselves. Knowing that your realtor will carry out an exchange with the same vested interest as their own brings a heightened level of confidence throughout the process.
Qualified Intermediary Fees
Before getting into how much QI’s are paid, let’s talk about their role in the 1031 Exchange process.
What is a Qualified Intermediary?
A Qualified Intermediary (also called accommodator) is the uninvolved third party who holds the proceeds from the sale of an investment property in a third party account until you close on the replacement property.
- acquires the original property from the owner,
- transfers the property to the buyer,
- holds the sale proceeds in escrow,
- acquires the replacement property from the seller, and
- transfers the replacement property to the borrower.
The IRS Section 1031 of the tax code has rules about who a QI cannot be. A qualified intermediary cannot be your real estate agent, someone related to you, or a person who is related to your real estate agent. Anyone who meets one of these criteria is a disqualified person, and puts you at risk of improperly completing the exchange. Done incorrectly, not only could you be facing a significant tax bill, but the funds coming from your initial sale could be tied up for up to six months.
You don’t want to spend all of your tax savings on fees for a QI. After all, you are trying to protect your income by deferring taxes in the first place. However, QI’s play a huge role in ensuring the 1031 process is smooth and successful, so finding a good one is crucial. Some Qualified Intermediaries will charge more based on the sales price of the properties, but most will fall into the range provided from $750-1250.
Some QIs charge a set fee for the documentation and support of one sale and one purchase—a typical exchange. Other QIs charge one fee for the sale and another for the purchase. If you purchase more than one replacement property, expect to pay an additional fee of $150 to $400.
You may think that sounds low for a role so essential to the process. Here’s the kicker: the qualified intermediary is generally entitled to keep the interest your money earns while they hold it in escrow. For example, if the sale of your property results in net proceeds of $250,000, the qualified intermediary holds this money in an interest-bearing account until the purchase of the replacement property is complete. This can be several thousand dollars of interest in many cases. This is typically how the qualified intermediary makes the bulk of their money.
Other 1031 Exchange Costs
With all real estate transactions, there are a set of standard escrow fees and closing costs. Escrow fees vary wildly from state to state and depend on the cost of the home. For this sake, we just want to distinguish between exchange expenses and non-exchange expenses.
Exchange expenses vs non-exchange expenses
Certain expenses paid at a closing are considered “exchange expenses” and using exchange funds to pay those expenses won’t result in any tax liability to an investor doing a 1031 exchange.
- Sales Commission
- Legal Fees
- Finders Fees
- Escrow Fees
- Inspection/Testing Fees
- Transfer Taxes
- Title Insurance Fees
- Recording Fees
- Property Taxes
Other expenses are not exchange expenses, so although exchange funds can be used to pay the expense, doing so results in the exchange being partially taxable.
- Rent Proration
- Property Liability Insurance
- Mortgage Insurance
- Application Fees
- Lender’s Title Insurance
- Assumption Fees
Ready to Exchange?
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