The 1031 Exchange Cost Nobody Quotes You

What the float is

To defer the tax you must not take receipt of your own proceeds, so a third party holds them between your two closings. That is the entire mechanism, and it is not optional.

Which means that for anything up to 180 days, a company you chose in an afternoon is sitting on the largest sum in your transaction. Deposited in a bank account, that sum earns interest. The industry calls it the float, and it is the real business model of a qualified intermediary.

How big it gets

Large enough that the setup fee is a rounding error against it.

Set that against a setup fee of $800 to $1,500 and the shape of the business becomes obvious. An intermediary holding $2,000,000 for four months earns something like twenty times its own quoted fee, from the same client, in the same transaction, without mentioning it.

Why nobody mentions it

Because nobody asks, and because there is no requirement to volunteer it. The assignment of interest sits in the exchange agreement, which is a document most people sign in a hurry during a closing. It is disclosed in the sense that it is written down. It is hidden in the sense that essentially nobody reads it.

It also explains something that otherwise looks strange: intermediaries discounting their setup fee aggressively on large exchanges. They are not competing away their margin. They are buying the balance.

Is it legal?

Yes, and it is worth being clear about that. This is a contractual arrangement between you and your intermediary, properly documented, entirely standard, and not prohibited by anything. Nothing improper is happening.

The point is narrower. It is that comparing intermediaries on setup fee alone compares the smaller of two numbers, and the smaller number is the one they choose to show you.

The other quiet costs

The float is the big one, but a handful of smaller lines routinely double a quoted fee:

• Per-property charges on any exchange beyond one-in, one-out, typically $300 to $500 each.
• Wire fees billed per transfer, at $30 to $150 a time, on an exchange that needs several.
• Rush fees of $200 to $500, which arrive precisely when you have no leverage to refuse them.
• Termination fees if you identify nothing in 45 days and the funds come back early.

Each of those is covered line by line here.

The question to ask

One sentence, in an email, before you sign anything: who receives the interest earned on my funds while you hold them, and where does the exchange agreement say so?

Any answer is fine. A firm that keeps the interest and says so plainly is being straight with you. What you are testing for is whether the answer comes back at all.