How Does A Qualified Intermediary Make Money

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You have just closed on your property and are looking to execute a 1031 exchange. Per IRS regulations, you need to establish a Qualified Intermediary (QI) and record another expense to complete the transaction. Although many other fees related to the transaction are standard and well-defined, it can be frustrating to gauge the cost for the services of a Qualified Intermediary. In order to understand what amounts to an appropriate fee owed to a QI, it is important to consider the services the QI provides and the risks it encounters in helping to execute a 1031 exchange.

There are two types of Qualified Intermediaries — institutional and non-institutional — and they typically vary in their fee structure. The institutional QIs are generally subsidiaries of banks or title insurance companies, and non-institutional QIs are independent companies. There are typically two sets of fees that both institutional and non-institutional Qualified Intermediaries will charge. These fees can vary depending on the complexity of the deal and the number of transactions involved in the 1031 exchange. Investors should consider a QI's experience in handling similar 1031 exchanges, as there are several potential risks that can occur during the sale and replacement period of a property.

Set-up and Administrative Fees

Institutional Qualified Intermediaries typically charge set-up and administrative fees that cover the sale of the relinquished property and the purchase of the first replacement property, which tend to range between $800 to $1,200 for the initial transaction. In addition, there may be a $200 to $400 charge for each additional replacement property processed in the exchange.

Conversely, non-institutional Qualified Intermediaries will seek to differentiate themselves from institutional QIs by charging less for set-up and administrative fees, typically between $600 and $800. These set-up and administrative fees tend only to amount to about one-third of revenues generated in this type of transaction for both institutional and non-institutional QIs. Thus, it is important to take inventory of the fees for which a non-institutional QI charges for other services.

Interest Income

Approximately two-thirds of income generated by Qualified Intermediaries in 1031 exchanges is earned via interest income. A large portion of a QI's role in a 1031 exchange is holding funds obtained from the sale of the relinquished property in escrow until a replacement property is identified and purchased. Consequently, Qualified Intermediaries earn a large portion of their fees via interest income from these funds. QIs can either offer lower set-up fees and take a higher percentage of interest income or charge a higher set-up fee and take a lower portion of interest income.

Some non-institutional Qualified Intermediaries seek to differentiate themselves from institutional QIs by advertising lower prices on these set-up and administrative costs. In these cases, it is extremely important for an individual or entity to understand the various fee structures offered by both types (e.g. institutional and non-institutional) of Qualified Intermediaries. A side-by-side look at fee structures offered by differing types of Qualified Intermediaries can help an individual better identify the best choice for a particular transaction.

Institutional Qualified Intermediary

Non-Institutional Qualified Intermediary

Classified as a subsidiary of a bank or title insurance company.

Standard upfront fees for the exchange of direct property range between $800-$1,200.¹

Subject to retaining a portion of the interest income earned.

Typically, Institutional QI's charge higher set up fees and take a lower portion of interest income.

Potential for additional fees based on specific nature of exchange.

Independent or unrelated to a larger financial institution.

Advertise slightly lower upfront or administrative fees between $600-$800.¹

Subject to retaining a portion of the interest income earned.

Typically, non-institutional QI's charge lower set up fees and take larger portion of interest income.

Potential for additional fees based on specific nature of exchange.

¹Estimated costs associated with delayed exchanges, NOT reverse or improvement exchanges

Please note: In instances where a Qualified Intermediary returns a portion or all interest income generated from funds held in escrow, the Qualified Intermediary will provide a Form 1099-INT to the individual or entity to file with his or her tax return.

Other Fees

While a large majority of a Qualified Intermediary's income is generated via interest income, set-up and administrative fees, there are other miscellaneous items for which a Qualified Intermediary may bill a client. Qualified Intermediaries conducting 1031 exchanges on a will for a deceased relative or spouse charge transaction fees for wire transfers, overnight deliveries, courier charges, facsimile costs, and other miscellaneous items. For Qualified Intermediaries conducting more complex 1031 exchanges, these miscellaneous items that appear on the bill may include fee structures for seller carry-back financing and other legal fees that are incurred because of the specific nature of the transaction.

It is important to understand the various components of Qualified Intermediary fees. Due diligence in identifying the Qualified Intermediary that is most capable of properly conducting a 1031 exchange is of the utmost importance. You should also seek to understand the fee structures offered by the array of Qualified Intermediaries on the market to avoid frustrations when the QI's bill arrives following the completion of the transaction. It may be beneficial to obtain and compare fee structures that different types of Qualified Intermediaries are offering in order to choose the best QI for your specific exchange.

To learn more about working with a Qualified Intermediary, call us at 512.871.0315.