A Guide to the 1031 Tax Deferred Exchange and the Qualified Intermediary

Most investors agree that utilizing a 1031 tax deferred exchange is definitely one of the best ways to go when interested in obtaining and selling property without the worry of paying large capital gains taxes. However, there are certain costs and transaction fees involved with a 1031 real estate exchange, which will usually depend upon the amount of risk that the Qualified Intermediary is taking, which is considered fair compensation. This is separate from the normal services they provide.

About two thirds of the QI’s 1031 tax deferred 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.

In order to make an informed choice for a QI, be sure to consider all of the facts and risks involved and make QI comparisons carefully before making your decision. Don’t forget that the size of the 1031 like kind exchange will have a direct effect on the level of risk that they are exposed to as it concerns the interest income from the deposits they keep.

A 1031 tax deferred exchange is typically utilized by an individual who wants to sell an investment property, without having to pay any taxes. Sound too good to be true? Find out more about the 1031 exchange at Info 2 Go.

categories: 1031 exchange,personal finance,taxes