A 1031 Tax Deferred Exchange
Most investors agree that utilizing a 1031 tax deferred exchange is definitely one of the best ways to go when interested in obtaining and selling property without the worry of paying large capital gains taxes. However, there are certain costs and transaction fees involved with a 1031 real estate exchange, which will usually depend upon the amount of risk that the Qualified Intermediary is taking, which is considered fair compensation. This is separate from the normal services they provide.
When you are considering which Qualified Intermediary to use, also known as an Accommodator, be sure to compare the various charges. These normally include administrative fees that cover the 1031 charges, income from any interest that is paid by the Intermediary, income from interest not shared by them and various other transaction and service commissions. The administrative and property fees on a tax deferred 1031 exchange for institutional QI (meaning those associated with a particular company) are usually 30 to 40% higher than those of a non-institutional QI. The former usually charges between $700 and $800, compared to the latter’s fee of $400 to $600 for a standard real estate 1031 exchange.
Interest income accounts for about two thirds of the Qualified Intermediary’s revenue from a 1031 tax deferred exchange; this is income that comes from the interest of the deposits that are held by the QI. They normally hold the interest from the funds that are obtained and deposited with them during your 1031 exchange and they have the option of sharing the full amount or only a portion of the income that is generated from the interest.
Some Qualified Intermediaries will include other charges for complicated, transactional structures, such as allowing the seller to go for carry-back financing, which means they want the QI to carry back a promissory or installment note. There are some other transaction fees that may go along with a IRS 1031 exchange, such as a wire transfer commission or mail and courier delivery charges, which some of the smaller QI’s will include in their fee structure. Knowing the details of these fees is always advisable when making your final choice of a Qualified Intermediary.
The use of a fee structure is considered a very fair and concise way in which to pay the Qualified Intermediary handling your 1031 tax deferred exchange, yet all of the details need to be evaluated and understood completely by everyone. Keep in mind that the exchange size has a direct affect on how much risk the QI is exposed to, since they are equally exposed to the interest income gains from the deposits being held by them. Also, some QI’s have the ability to make their fee schedule look less expensive than the competition, so consider all of the facts involved in a 1031 like kind exchange and compare each proposal to make an informed decision.