How Much Are 1031 Accommodator Fees?

A 1031 exchange allows an investor to defer capital gains taxes on a business or investment property by reinvesting the proceeds into a like-kind asset. The process requires using a Qualified Intermediary (QI), also known as an accommodator, as mandated by Internal Revenue Code Section 1031. The QI is a neutral third party who holds the funds from the sale of the relinquished property and uses them to acquire the replacement property on behalf of the investor.

This structure ensures the investor does not have actual or constructive receipt of the sale proceeds, preserving the transaction’s tax-deferred status. An investor’s attorney or accountant is generally prohibited from acting as their QI if they have provided services within the preceding two years.

Standard Accommodator Fee Structures

The most common pricing model is a flat fee for a standard, straightforward transaction known as a delayed exchange. This involves selling one property and subsequently purchasing another. For this service, fees range from $600 to $1,200. This standard fee covers the essential components of the exchange process, ensuring the transaction is structured correctly to meet IRS regulations.

Included in this base price is the initial consultation, preparation of all necessary 1031 exchange documents, and holding the exchange funds in a secure, often segregated, escrow account. The fee also covers the QI’s coordination with the closing agents, attorneys, and other professionals involved in both the sale of the relinquished property and the purchase of the replacement property.

Another, though less common, fee structure involves charging a percentage of the property’s value. This is more likely to be seen in very large or highly complex transactions where the QI’s liability and workload increase significantly. However, for the vast majority of exchanges, the flat-fee model prevails.

Factors Influencing Total Cost

Several factors related to a transaction’s complexity can increase the price beyond a simple flat fee. The type of exchange is a primary determinant of the cost. While a standard delayed exchange is the least expensive, more complex structures like reverse or construction exchanges command higher fees due to the increased workload and risk for the accommodator.

A reverse exchange, where the replacement property is acquired before the relinquished property is sold, is substantially more complicated. It requires the QI to create a special-purpose entity to take title to the property, which involves additional legal work. Consequently, fees for a reverse exchange can range from $4,500 to $7,500 or more.

A construction or improvement exchange, where exchange funds are used to make improvements on the replacement property, also involves greater oversight from the QI, leading to higher costs, often starting around $7,000.

The number of properties involved also directly impacts the cost. If an investor plans to sell one property and acquire multiple replacement properties, or sell multiple properties to consolidate into one, the QI will charge an additional fee for each extra property. This additional per-property charge ranges from $300 to $400.

Additional and Ancillary Charges

Beyond the standard administrative fee, investors should be aware of potential ancillary charges that can appear on the final invoice. These are costs for specific transactional services that are not bundled into the base fee.

Common additional charges include fees for wire transfers and overnight document delivery. Each time the QI needs to wire funds to a closing agent or send documents via courier, a separate fee may be assessed. These transactional costs, while individually small, can accumulate over the course of an exchange involving multiple properties. Some QIs may also charge for special processing or rush requests if documents or funds need to be handled on an expedited timeline.

Interest Earned on Exchange Funds

After a sale, the funds are transferred to the QI, who holds them in an interest-bearing account until they are needed to purchase the replacement property, a period that can last up to 180 days. The arrangement for how this earned interest is handled can significantly affect the overall cost-effectiveness of the QI’s services.

There are several common models for distributing the interest. In one arrangement, the accommodator retains all the interest earned on the exchange funds. This is often how QIs can offer a very low upfront administrative fee, as the interest income constitutes a major portion of their revenue. For large transactions, the amount of interest kept by the QI can far exceed the flat fee.

Another common structure is a split of the interest between the investor and the QI. A third model allows the investor to receive all the interest earned, though this arrangement often comes with a higher upfront administrative fee. Some firms even offer a “no-fee” exchange, where their entire compensation is derived from a share of the interest earned.

Regardless of the arrangement, any interest paid to the investor is considered taxable interest income and will be reported on a Form 1099-INT. Understanding the QI’s policy on interest is important, as a low fee combined with the accommodator keeping all the interest may not be the best overall value for the investor.

Payment and Tax Treatment of Fees

The payment of accommodator fees is handled at closing, where they are paid directly from the exchange proceeds held by the QI. This means the investor does not need to pay for these services with out-of-pocket funds. The fees are simply deducted from the total amount before the funds are used to acquire the replacement property.

From a tax perspective, fees paid to a Qualified Intermediary are considered a direct expense of the sale of the relinquished property. As such, they can be paid from the exchange proceeds without creating a taxable event, known as “boot.” These costs are treated as a reduction in the amount realized from the sale, effectively lowering the recognized capital gain.

This treatment applies to the core administrative fees charged by the QI. Along with other qualifying closing costs like broker’s commissions and transfer taxes, these expenses reduce the net proceeds from the sale. It is important to distinguish these allowable exchange expenses from non-qualifying costs, such as loan acquisition fees or property tax prorations, which cannot be paid from exchange funds without a taxable consequence.