How Much Should You Be Paying for a 1031 Exchange? [New Research!]

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Everyone enjoys a good bargain. But when it comes to the 1031 exchange fees charged by your qualified intermediary (QI), how can you tell if it’s really a bargain?

The value offered by qualified intermediaries can make or break your 1031 exchange experience and feasibility. Their services can be as disparate as their cost. Prices range from $450 to over $1,500 per 1031 exchange. Our research found that QIs in all price ranges offer a wide variety of fee structures, education, support, and fund-handling practices. Consequently, savvy investors do not make their selection based on price alone.

What Are You Paying for?

Let’s focus on the three specific IRS requirements regarding qualified intermediaries. For their fee, the QI should, at a minimum:

1. Be involved at or prior to the sale,
2. Be an unrelated third party, and
3. Document the exchange.

That’s it. QIs are largely unregulated. In all but nine states, there is no government oversight. As a result, how they deal with you and secure your funds is up to each QI.

What 1031 Exchanges Cost

Our research found that the median cost of an exchange, regardless of the level of service provided, is $750. Thirty percent of the QIs surveyed were more expensive, and 20 percent were less expensive. The median price for the purchase of a second replacement property is currently $250, with 40 percent of the QIs charging more and only 10 percent charging less.

Optional 1031 Exchange Services

You trust your hard-earned capital to the management and control of your QI. With this in mind, here are some questions to consider in addition to price:

Do they guarantee their exchange documentation?

Documentation of the exchange is an IRS requirement. Consequently, your QI should stand behind their work. Look for those who guarantee that the paperwork they provide will meet all IRS standards.

Related: How a 1031 Exchange Can Make You Millions

Will your funds be commingled or secured separately?

To have a successful exchange, the QI’s management and documentation of the flow of exchange funds must show you did not have actual or constructive receipt of funds. But what about the security of your funds? Traditionally, QIs have commingled exchange funds in a trust or escrow account that is under their exclusive control. But your strongest protection is the use of a dual signatory, segregated, FDIC-insured exchange account.

Above all, ensure that your exchange has its own unique and separate account that takes two signatures to move money—yours and the intermediary’s. This does not rise to the level of constructive receipt by IRS standards.

What exactly does the exchange fee cover?

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. By contrast, lawyers may charge by the hour. Verify what additional fees, if any, there may be—for example, charges for wire transfers, expedited services, or dual signatory accounts.

If you purchase more than one replacement property, expect to pay an additional fee of $150 to $400. Our research of selected QIs found that all but one of them charges for documentation of additional replacement property purchases.

Do they offer audit assistance?

If your exchange is ever audited, good QIs provide support and documentation as needed, typically at no charge.

How responsive are they?

Pay attention to how long it takes for your QI to answer your phone calls and emails. Avoid firms that are slow to respond or have poor communication skills. Timing is of the essence in a 1031 exchange. When you are at the closing table, you want to know that you can get assistance if you need it.

What is their level of experience?

You want to look for a QI that has solid and current 1031 experience, a good reputation in the industry, and demonstrated results. Seek current references or online testimonials. Do not select a QI that does not have a history to back up their claims of expertise.

Do they offer education and support?

If you are new to 1031 exchanges, understanding the process and its rules and regulations is essential to a smooth transaction. Will they remind you of the 45- and 180-day deadlines, or is that on you? Will they coordinate everything with your title company, or will you be expected to facilitate that communication? Make sure your QI has the resources to address your questions and provide you with tools to maximize the return on your investment.

Related: The 8 Basic Rules Investors Should Know About 1031 Exchanges

3 Different Types of Qualified Intermediaries

As you research, remember that there are some advantages and disadvantages to different types of QIs:

Internet-Based Companies

Internet-based companies may offer you a lower price, but fewer services. These groups specialize in meeting the minimum requirements and streamlining their processes. They tend to offer little or no personal consultation and limited real-time support. If your 1031 hits a snag, there may be no one readily available to troubleshoot or provide guidance. When doing your due diligence with such firms, pay special attention to their responsiveness.

Small Law Firms

Small law firms that only do a few exchanges a year will usually charge higher rates. They typically provide excellent personal service. However, because they don’t see that many exchanges, their pool of knowledge may be expanded at your expense. This is because so much of 1031 law involves ongoing interpretation and case law, not the original statute. Select a QI with up-to-date experience.

Large, National Firms

Large, national firms benefit from economies of scale. This can result in lower costs and better response times. But your experience will only be as good as the sales representative assigned to you. Look at online reviews to verify that your representative is a seasoned 1031 consultant with broad experience in the field. One bad piece of advice can jeopardize your entire exchange quickly.

The selection of your QI recalls the story of Goldilocks and the three bears. One QI may offer a bargain price but commingle your funds or have long response times. Another QI may give you great customer service but might be too expensive. Then there’s the QI that’s just right: big enough to competently take care of all your needs, but also responsive and cost-effective. Choose a QI that offers the security and support level you need to rest easy.

How much do you pay for 1031 exchanges?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.