What Are the Common 1031 Exchange Fees?
Are you looking to invest in real estate using a 1031 exchange? If so, you need to be aware of what fees come with using one. Most investors don’t realize just how costly these fees can be.
When done improperly, you can lose thousands if not hundreds of thousands of dollars that were meant to be invested. Both the buyer and the seller are required to pay fees as part of the 1031 exchange process.
With that said, what are the most common 1031 exchange fees?
With this guide, you can ensure you have all the information you need. Read on to learn more.
Qualified Intermediary (QI) Fee
It allows them to sell an investment property and reinvest the proceeds in another, often more, lucrative property without owing any capital gains taxes. A qualified Intermediary (QI) is a third party that holds money from the sale of the original property, the “exchanged” property, and facilitates the exchange from one property to the next.
Common 1031 Exchange investments fees include appraisals, title insurance, surveys, government recording fees, and the QI fee. The QI fee is the fee charged by their services. The total cost will depend on the type and complexity of the transaction, so fees vary from $500 to $2,500 or more.
These are in addition to the usual closing costs associated with any real estate purchase/sale. It may include taxes (withholding, Stamp Duty, and capital gains tax), attorney fees, escrow, title fees, and fees for the qualified intermediary who facilitates the exchange.
Depending on the sophistication of the exchange, there may be additional fees such as account set-up fees, document preparation fees, or due diligence fees. With the right guidance, investors can use 1031 exchange deferred sales trust methods to maximize their investments
Real Estate Agent Commissions
The purchaser pays the real estate agent a commission. This is typically a flat fee, although some agents may negotiate a portion of the commission based on the overall value of the purchase transaction. In addition to the agent commissions, exchange fees for middlemen and attorneys are often associated with the 1031 exchange rules.
These can range anywhere from 1% to 3% of the total purchase price, depending on the complexity of the exchange. In order to minimize these fees, investors should explore the possibility of seeking advice from qualified 1031 exchange trustees and practitioners.
Property Inspection and Appraisal Fees
These fees are used to make sure a property meets certain standards and is safe for rental or occupancy. These fees can be expensive depending on the complexity of the inspection and the jurisdiction in which it is performed. An appraiser is then employed to determine the value of the replacement property based on the inspection report.
The appraisal fee is 1-2% of the replaced property’s purchase price. Other fees associated with property inspection and appraisal include the cost of environmental assessments, if applicable, as well as fee retention for the inspector or appraiser if retained separately.
Choosing the Right 1031 Exchange Fees For Your Needs
1031 Exchange fees include inspection fees, title fees, inspection fees, and taxes. Ultimately, the fees incurred in a 1031 exchange depend on several factors and should be discussed with a qualified intermediary or tax advisor.
A 1031 exchange can provide an excellent tax deferral strategy for real estate investors. Reach out to a qualified intermediary to discuss your options and see if a 1031 exchange is the best move for you.
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