1031 exchange costs and interest payments from QI?

Question

Hey I heard that some 1031 exchange QI's will actually give interest payment on the amount they hold?  Is that true?

For example--

$100,000 in a 1031 held for 3 months would cost the investor $500.  If the QI would pay 1% intersest on the $100k for the 3 months.  So the investor would gain $250.

So the investor would only pay the QI $250?

Also if the 180 days expired is it typical for the investor to pay the QI less fees?

What are typical QI costs?

(this is just an example not real numbers)

Susan O. · Answer

I've seen them online if you just google search them.

This QI is investing the funds.  He is not an institutional QI

The actual balance is around $500k

Dave Foster · Answer

@Susan O., a lovely thought, to let accumulated interest pay the fee.  And I'm sure there are some QI's out there looking at the escrow accounts as their own investment candy store and willing to treat you as a passive partner who brings the cash.   But you probably want to be careful and ask a lot of questions about where your interest is coming from.

Because It's almost a certainty that in order to pay you interest a QI has to be receiving interest on your funds. If they are receiving interest on your funds it is probably because they are not held in a segregated account and definitely not in a dual signatory account.  These are not cheap to set up and depository banks have plenty of free money from the fed to seed their investments they don't need to pay to get yours (hence current money market rates).  Your trade off for receiving interest is dramatically lessened security of your funds.

In addition to less security there is a huge conflict of interest in my opinion.  you also have a QI with a personal vested interest to make margin on your funds. You probably want a QI who is thinking and acting as a QI and not an investment manager.

Fees nationwide are pretty close - from 700 - 1000 for a normal garden variety exchange loosely regional.  If you encounter an outlier ask questions.  It could be your unique situation causing the outlier.  Or it could be their lack of experience, economy of scale.  Or it could be too good to be true - and you know that that means right?!

Most QI's charge that fee on the closing statement of the relinquished property so it is a cost of the sale reducing gain.  It also protects you so that if the property doesn't sell you don't pay. The QI has no impact on the final outcome and since they consult throughout the process that fee is not typically refunded.  If it was then you would have to declare it as income or amend your tax return to increase the taxable gain from the sale.

David Miller · Answer

In NC, fees to a QI are typically a ~$750 flat fee.  Typically that fee is not reduced if the 180 days lapse.