A 1031 exchange is a fantastic tool for investors and business owners who are looking to make the most of their finances when it comes to growing their enterprise. A 1031 exchange is a tax incentive that enables the owner of investment property to sell it and acquire a like-kind property whilst deferring capital gains tax.
However, in order to take advantage of a 1031 exchange, you need a qualified intermediary. This is a registered professional that sells your property on your behalf, acquires the replacement and then transfers the deeds to you. Between the sale and purchase, a qualified intermediary holds the proceeds of the sale of the relinquished property, prepared the legal documents and ensures that the entire process is completed within the IRS guidelines.
However, as you might expect, the complexity of the process means that qualified intermediaries do charge for their services. Every qualified intermediary is free to set out their own fees and charges, and this should be taken into account when it comes to choosing someone to act as a QI.
Elements to Consider When Looking at the Cost of a 1031 Exchange
There are numerous different financial elements that you should consider when it comes to determining the true cost of choosing a 1031 exchange. These include:
The administrative fees that you will be charged
Per property charges
The interest income paid to you
The interest income that is retained by your qualified intermediary
Any transactional or services fees (such as wire transfer fees, check disbursement fees, etc)
Service charges for Qualified Trust Accounts
The sum of all of the elements above will enable you to see approximately what your 1031 exchange will end up costing you. However, most people who undertake a 1031 exchange feel that this amount pales into insignificance when it is weighed up against the potentially massive saving that they are making by deferring their capital gains tax.
The Cost of Complexity
Much like any other transactions, the exact fees that you will accrue in your 1031 exchange will primarily depend on the complexity of your individual circumstances and the type of 1031 exchange that you are undertaking.
A delayed exchange
This is the most common type of 1031 exchange within which the relinquished property is first sold before the replacement property is acquired within the 180-day time limitation. The fees for this type of exchange usually fall between $750 and $1250 based on the qualifying, accommodation and administrative work of the 1031 exchange. If additional properties become involved in the transaction, additional fees may apply.
In addition to the standard fees charges above, most qualified intermediaries will also earn interest on the exchange process whilst they are held in escrow. The qualified intermediary will, however, also be responsible for paying all necessary taxes on this amount.
A reverse exchange
A reverse exchange is where the replacement property is acquired before the relinquished property has been sold. Whilst this gives you the peace of mind that you have secured your desired replacement property, the fees are higher in direct proportion to the risks taken by the qualified intermediary in acquiring the new property first. Fees for a reverse exchange can range from $3500 to $7500, again with additional fees being applied for any additional properties.
If you are considering a 1031 exchange and would like more information about the costs involved, our expert team would be happy to discuss these with you. Call SellTaxFree.com in Carlsbad, CA today to schedule an appointment.