When an investor uses the 1031 tax deferred exchange they will avoid paying large capital gain taxes; however, there are other costs and transactions fees involved. The fees involved usually have to do with fair compensation for services performed by a Qualified Intermediary that are above and beyond their normal scope of required duties.

About two thirds of the QI’s 1031 exchange revenue comes from income that is generated from the interest. Interest income is what is gained from the interest of the deposits with the Qualified Intermediaries; they can hold the interest gained on your deferred 1031 exchange funds while the funds are deposited with them. They may choose to share some or a full portion of the income generated from the interest as well.

Using a fee structure is a clear and fair way to pay for the services rendered by your Qualified Intermediary. This structure should be evaluated, negotiated and understood clearly by everyone involved in the 1031 tax deferred exchange. The size of the exchange transaction does have a direct affect on the amount of risk involved, as the QI is exposed equally to the gains in interest income that is held by them.

Some Qualified Intermediaries can market their fee structure for a 1031 exchange to appear less expensive that others, however once you consider all of the facts, especially the interest income retained by them, you should be able to make an informed choice.

The fee structure used for paying the Qualified Intermediary for your 1031 tax deferred exchange needs to be negotiated and understood completely by all involved parties. Keep in mind that the size of the 1031 like kind exchange will have a direct impact on the amount of risk that they are exposed to, with regard to the interest income gained from the deposits they retain.