1031 Exchange Costs: What You'll Pay and What Creates Boot

What does a 1031 exchange actually cost?

Start by separating two kinds of cost. The first kind exists because you're selling and buying real estate, and you'd pay it with or without an exchange. The second kind exists because of the exchange itself, or because of the replacement property you choose.

Here's the inventory I walk through with owners, roughly in the order the money moves:

The only line that exists purely because you chose an exchange is the qualified intermediary (QI) fee, plus any added review from your advisors. Everything else is the cost of a real estate trade.

That framing matters because owners sometimes skip an exchange on the theory that "the fees eat the benefit." On a direct property-for-property exchange, that's rarely true. The QI fee on a standard delayed exchange is usually a small number next to a six- or seven-figure tax bill. The expensive decisions are the replacement property you pick and how you pay the closing costs.

What does a qualified intermediary charge?

A QI holds your sale proceeds and documents the exchange so you never have actual or constructive receipt of the money. For a standard delayed exchange with one property sold and one bought, the fees I see quoted are generally in the low thousands of dollars, with added charges for extra properties, wire fees, and overnight document handling. Reverse exchanges and improvement (build-to-suit) exchanges cost far more because the intermediary or an affiliate has to take title to property and hold it, which brings entity setup, insurance and sometimes lender coordination.

The fee is only part of the QI's economics. Many intermediaries earn money on the float: the interest your funds earn while they sit in the exchange account. Ask what interest you'll receive, at what rate, and whether the account is segregated or pooled. I cover how to choose an intermediary, including what to ask about fidelity bonds and account structure, in How to Choose a Qualified Intermediary.

My view: don't shop QIs on price alone. A few hundred dollars of fee difference is meaningless next to the risk of a poorly capitalized intermediary holding a seven-figure balance. Intermediaries have failed, and when they did, exchangers lost money and missed their deadlines.

Title, escrow and recording

Title and escrow costs follow local custom, not tax law. In much of Northern California, for example, buyer and seller split escrow fees and the seller often pays the owner's title policy, while customs differ in Southern California and in other states. Your escrow officer can tell you what's customary in the county.

In an exchange you usually pay these costs twice, once on each side. That's not an exchange cost; it's the cost of buying another property. The one exchange-specific wrinkle is that the escrow officer needs the QI's assignment documents and wiring instructions before the relinquished closing, and the replacement escrow needs to know the funds will arrive from the QI, not from you.

Transfer taxes

Transfer taxes vary more than any other closing cost, and they can be large. California counties charge a documentary transfer tax of $1.10 per $1,000 of value, which is $2,750 on a $2.5 million sale. Some cities add their own tax on top, and a few charge rates that change with price. San Francisco's schedule has run as high as 5.5% and 6% on the largest transfers, and the City of Los Angeles's Measure ULA charges 4% and 5.5% above thresholds that adjust each year (for deeds recorded on or after July 1, 2026, the thresholds are about $5.4 million and $10.9 million). Both cities' rates were the subject of reform proposals and ballot activity in 2026, so get the current schedule from your escrow officer before you price a sale.

Transfer taxes on the sale are a cost of disposing of the property. They reduce your amount realized and can be paid from exchange proceeds without creating boot under the prevailing view, which I explain below.

Lender fees

If you borrow to buy the replacement property, expect origination fees or points, a lender's title policy, an appraisal the lender orders, third-party reports such as a property condition report or Phase I environmental report the lender requires, and sometimes a rate-lock deposit.

These are the costs that cause the most trouble in exchanges, because most tax advisors treat them as costs of getting a loan rather than costs of buying property. If exchange funds pay them, you may have taxable boot. I'll come back to how people handle that.

If you're paying off an existing loan at the sale, prepayment penalties, yield maintenance or defeasance costs also come out of the relinquished closing. Many practitioners treat a prepayment penalty on the relinquished property as a selling expense, but this is an area where you want your CPA's view in writing before closing.

Which closing costs can exchange funds pay without creating boot?

This is the most practical question in the guide, and I want to be candid: the law here is thin. There's no Code section or regulation that lists which closing costs exchange money may pay without tax. What exists is a handful of older rulings, one regulation written for a different purpose, and decades of practitioner consensus.

Here's what the authorities say.

Treasury Regulation §1.1031(k)-1(g)(7). The deferred-exchange regulations let the QI pay certain "transactional items" from exchange funds without blowing the safe harbors that protect you from constructive receipt. The regulation describes them as items that relate to the disposition of the relinquished property or the acquisition of the replacement property and appear under local standards in the typical closing statement as the responsibility of a buyer or seller, and gives examples: commissions, prorated taxes, recording or transfer taxes, and title company fees. Read carefully, this paragraph answers whether paying these items ruins the safe harbor. It doesn't directly answer whether paying them is taxable boot. Practitioners nonetheless use it as the main guidepost.

Revenue Ruling 72-456. The IRS ruled that brokerage commissions paid in an exchange offset cash boot received, which is the basis for treating selling costs as reducing what you received. The ruling is old and narrow, but it's the cleanest authority we have on selling costs.

Form 8824. The IRS form for reporting a like-kind exchange lets you reduce cash and other property received by exchange expenses you incurred. The instructions treat exchange expenses as an offset, which is consistent with the consensus.

From those sources, the practice has settled on a distinction between transactional costs (costs of selling or buying the real estate itself) and operating or financing costs (costs of running the property or getting a loan). Here's how most tax advisors I work with sort the common items:

The test I use to explain it: would this cost exist if you bought the property for all cash? If the answer is yes and it's about the transfer of the real estate, it's probably an exchange expense. If it exists only because you borrowed, or because the property is operating and has tenants, it probably isn't.

Some items sit in a gray zone. Prorated property taxes are listed in the (g)(7) example, yet many advisors still treat a proration credit as an operating item. Security deposits are a liability you're handing to the buyer, and some advisors net them against the debt you take on in the replacement property; others treat a deposit credit as boot. When the authority is this thin, reasonable advisors differ, and you should know which approach yours is taking before you sign the closing statement.

How do people avoid boot from loan costs and prorations?

The approaches I see most often are simple:

• Bring outside cash. Write a check for loan fees, the lender's title policy and the lender's reports at the replacement closing. Nothing from the exchange account touches them.
• Have the loan fund its own costs. If the lender finances its fees within the loan amount, exchange funds don't pay them. Your CPA should confirm how this is documented on the closing statement.
• Cover rent prorations and deposits on the sale side. If the buyer gets a $40,000 credit for security deposits and prorated rent, that credit reduces the cash wired to your QI. Some exchangers wire their own $40,000 to the QI after closing to restore the balance. Ask your QI whether it accepts added funds and how they're treated.
• Fund deposits from the exchange account directly. If your replacement contract needs an earnest money deposit, the QI can usually send it from the exchange account. If you pay the deposit yourself and get reimbursed from exchange funds at closing, that reimbursement is cash to you.

The amounts here are usually small compared with the gain, so even if a cost does create boot, the tax is often modest. On a $25,000 loan fee treated as boot, the federal tax at a 25% unrecaptured §1250 rate plus 3.8% net investment income tax is about $7,200, plus state tax. Annoying, not fatal. The bigger danger is sloppy closing statements that move money in ways nobody tracked, and the fix for that is having your CPA review both statements before signing.

What about credits and repairs?

A credit for repairs the buyer negotiates on your sale lowers your sale price; it isn't boot, it just reduces what you realize. A credit you receive on the replacement purchase lowers your purchase price, which matters if you were relying on that price to match or exceed what you sold for.

The trap is a credit that comes out as cash. If the replacement seller gives you a $50,000 closing credit and the exchange funds exceed what's needed, the excess sits in the QI account. You can't take it as cash without tax, and under the (g)(6) restrictions you generally can't take it at all until the exchange period ends or you've acquired all the property you identified.

How do the costs change your gain and your new basis?

Exchange expenses don't disappear; they change the arithmetic. Selling costs reduce your amount realized, which reduces your gain. Buying costs (title on the purchase, recording, the QI fee in most treatments) are added to the basis of the replacement property.

Say you sell a building for $2,500,000. Your commission is $100,000, title, escrow and recording come to $7,250, and the county transfer tax is $2,750. Your selling costs total $110,000 and your amount realized is $2,390,000. If your adjusted basis is $900,000, your realized gain is $1,490,000.

If you replace with a $2,600,000 property and spend $15,000 on purchase-side title, escrow and the QI fee, your replacement basis starts at $2,615,000 minus the $1,490,000 of deferred gain, or $1,125,000. The costs you paid came back to you as basis that you'll depreciate.

That's why I don't think of exchange-funded closing costs as lost. A commission paid from exchange funds is a real cost, but it reduces the gain you'd otherwise defer and doesn't trigger tax.

What fees come with a DST?

If you're exchanging into a DST interest, the costs change shape. You aren't paying a commission and escrow fee directly. You're buying a beneficial interest in a trust that owns real estate, and the costs of raising the money, buying the property and running the trust are paid out of the offering proceeds and the property's income. You don't write a check for them; they come out of the equity you invest.

Here are the categories you'll find in nearly every DST private placement memorandum (PPM):

Selling commissions. Paid to the broker-dealer that sells you the interest, and in part to the registered representative. This is how firms like mine are compensated, and you should know the number. It's disclosed in the PPM.

Dealer manager or managing broker-dealer fees, marketing and due diligence allowances. Paid to the firm that organizes the sales effort and for the costs of selling the offering through other broker-dealers.

Offering and organization costs. Legal fees for the PPM and trust documents, accounting, printing, filing fees and the sponsor's costs of putting the offering together.

Financing fees. If the property carries a loan, the lender's fees and often a fee to the sponsor or an affiliate for arranging the loan.

Acquisition fees. Paid to the sponsor for finding and buying the property, often stated as a percentage of the purchase price.

Reserves. Cash set aside for repairs, leasing costs or shortfalls. Reserves remain trust assets, so they aren't a cost in the same sense as the others, but they're equity that isn't invested in the real estate on day one.

Ongoing fees. An asset management fee to the sponsor, property management fees, trustee fees, and accounting and tax-reporting costs. In master lease structures, the master tenant (usually a sponsor affiliate) keeps the difference between the rent it collects from the property and the rent it pays the trust.

Disposition fees and back-end interests. When the property sells, the sponsor may take a disposition fee, often a percentage of the gross sale price, and sometimes a share of profit above a stated return to investors.

There's also a cost that may not appear in the use of proceeds table at all: the difference between what the sponsor paid for the property and the price at which it sells the property to the DST. Some sponsors buy a property, hold it briefly and sell it into the trust at a higher price that bakes in their costs and profit. Some PPMs disclose the sponsor's own purchase price; when they do, compare it with the DST's price. When they don't, ask.

How do you read a PPM's "Estimated Use of Proceeds" table?

Every DST PPM includes a table showing where the money comes from and where it goes. It's usually a page or two into the offering summary. Reading it well takes about ten minutes and a calculator, and it's the single most useful thing you can do before investing.

Below is a hypothetical table. The numbers are made-up round figures for illustration only and do not represent any actual offering, sponsor or property.

Now the reading. I do it in five passes.

1. Find the denominator. Fees look smaller as a percentage of total capitalization (equity plus debt) than as a percentage of your equity. In this example, everything other than the purchase price adds up to $9,000,000. That's 9% of total uses, but 18% of the equity investors put in. With 50% debt, every fee stated against total capitalization is twice as large against your money. When someone quotes a load percentage, ask what it's a percentage of.

2. Separate the buckets. I break the $9,000,000 into four groups because they mean different things:

• Costs of selling the securities (commissions, dealer manager, offering and organization): $4,000,000, or 8% of equity.
• Sponsor fees for buying and financing (acquisition and financing fees): $2,320,000, or 4.64% of equity.
• Third-party costs any buyer would incur: $1,180,000, or 2.36% of equity.
• Reserves, which stay in the trust: $1,500,000, or 3% of equity.

So the same offering could be described as having an 8% load (securities costs only), a 15% load (everything except reserves) or an 18% load (everything except the purchase price). All three are accurate. I look hardest at the 15% figure, because that's the equity that never becomes real estate or cash in the trust.

3. Compute day-one equity value. If the property were worth exactly its $91,000,000 purchase price the day after closing, the trust's equity would be the property plus reserves minus the loan: $91,000,000 + $1,500,000 − $50,000,000 = $42,500,000. Investors put in $50,000,000. On day one, before any appreciation, each dollar invested is backed by about 85 cents of net asset value. The property has to appreciate, or the loan has to amortize, by $7,500,000 just to get investors back to even on a sale before considering sale costs.

4. Translate it to your check. If you invest $1,000,000 in this hypothetical offering, you own 2% of the trust. Your share of the purchase price is $1,820,000, your share of the loan is $1,000,000, your share of all non-property uses is $180,000, and $30,000 of that is your share of reserves. That's $150,000 of your $1,000,000 that goes to costs rather than real estate or reserves.

5. Check the back end. The table only covers day one. Read the compensation section for the ongoing and exit fees. Suppose this hypothetical offering charges a disposition fee of 2% of the gross sale price, and the property later sells for $100,000,000. The fee is $2,000,000, which is 4% of the original equity. Fees based on gross property value hit equity harder the more debt there is.

A few more things I look for in the PPM:

• Is the acquisition fee stated as a percentage of the purchase price, and is the sponsor also earning a spread from buying the property first?
• Does the asset management fee come out before or after investor distributions, and can it be deferred if cash flow is short?
• How large are the reserves relative to the property's age, roof and mechanical systems, and the lease expirations? Thin reserves make the load look smaller and the risk larger.
• Who is the master tenant, and how much does it keep between the property rent and the trust rent?
• Is there a back-end profit interest, and above what return does it start?

You can also cross-check some figures against the sponsor's Form D filing on the SEC's EDGAR system. Form D includes items for sales commissions and finders' fees and for the use of proceeds paid to executive officers, directors and promoters. The numbers are estimates, but if they differ sharply from the PPM, ask why.

How do fees compare with the tax you're deferring?

This is the comparison I think every owner should run before buying any replacement property, DST or otherwise. A 1031 exchange defers tax; it doesn't eliminate it. Paying a large fee to defer a small tax can make you worse off.

I'll use the building from earlier: a $2,500,000 sale, $110,000 of selling costs, and an amount realized of $2,390,000. To keep the math clean, assume the property is free and clear, you're married filing jointly, and you have enough other income that the gain is taxed at the top federal rates. The federal long-term capital gains rate is 20% for 2026 taxable income above $613,700 on a joint return, unrecaptured §1250 gain is taxed at up to 25%, and the 3.8% net investment income tax applies above $250,000 of modified adjusted gross income for joint filers. For California I'll use an illustrative 12% blended rate; your actual state tax depends on your income and filing details.

Case A: a long-held property with a large gain. You bought it years ago for $1,300,000 and took $400,000 of depreciation, so your adjusted basis is $900,000 and your gain is $1,490,000.

Paying the tax leaves you $1,836,580 to reinvest. Exchanging keeps all $2,390,000 working.

Now suppose you exchange the full $2,390,000 into the hypothetical DST above, where 15% of equity goes to costs other than real estate and reserves. That's $358,500. You've deferred $553,420 of tax and paid $358,500 of load. You still have $2,031,500 of equity in real estate and reserves, which is $194,920 more than the $1,836,580 you'd have after paying tax. On these numbers the exchange into a high-load product still comes out ahead on day one, though by much less than the tax figure suggests.

Case B: a recently bought property with a small gain. Same $2,500,000 sale and $2,390,000 realized, but you bought the property a few years ago for $2,150,000 and took $150,000 of depreciation. Your adjusted basis is $2,000,000 and your gain is $390,000.

A 15% load on $2,390,000 is still $358,500, more than twice the tax you'd defer. If you paid the tax and bought a direct property, you'd keep $2,242,880 to invest. Exchanging into the hypothetical offering leaves you $2,031,500. You'd be $211,380 behind on day one, before considering whether either investment performs.

That's the reason I pay attention to what you're giving up. A DST can make sense for an owner who wants out of management, needs to replace debt, or has to close inside the 180-day window, and those reasons have real value. But on a small gain, the load can cost more than the deferral is worth, and you should see that number before you decide.

Three things complicate the comparison, and they cut both ways.

First, the deferred tax doesn't go away. It carries into your replacement property through a lower basis, and it comes due when you eventually sell in a taxable sale. The benefit of deferral is the use of that money in the meantime, plus the option to keep exchanging.

Second, under current law, heirs who inherit property generally receive a basis stepped up to fair market value at death, which can eliminate the deferred gain for them. The One Big Beautiful Bill Act set the federal estate tax exemption at $15 million per person for 2026, indexed after that. Estate and basis rules can change, and planning around them belongs with your estate attorney and CPA.

Third, a direct replacement property has costs too: your purchase-side closing costs, lender fees, and the time and money of managing it. Those are usually much smaller than an offering's load, but they aren't zero, and management has a cost even when you do it yourself.

What mistakes cost owners the most money?

In my experience the biggest dollar mistakes in exchanges come from timing and structure, not from fee line items. On costs specifically, here's what I see most often:

• Signing the closing statement without the CPA seeing it. Loan fees and prorations end up paid from exchange funds by default because nobody told escrow otherwise.
• Reimbursing yourself. You pay a deposit or an inspection out of pocket and then get reimbursed from exchange proceeds at closing. That reimbursement is cash to you.
• Leaving money in the account. Owners buy a replacement worth less than they sold for, or with less debt, and are surprised by boot. That's not a fee issue, but it's the most common way exchanges become partly taxable. I cover the math in Partial 1031 Exchanges and Boot.
• Comparing DST offerings on distribution rate alone. A higher stated distribution can come from more debt, thinner reserves or a richer price. The use of proceeds table and the debt terms tell you more than the headline.
• Choosing the cheapest QI. Saving a few hundred dollars isn't worth taking on intermediary risk with your entire sale proceeds.

Risks and limitations

If you're considering a DST or another securities offering as replacement property, the costs above are one of several risks you take on. These are the ones I make sure every investor understands:

• Fees and load. Upfront costs reduce the equity invested in real estate, and ongoing and disposition fees reduce what reaches you. The property has to appreciate just for you to recover the load.
• Illiquidity. DST interests generally have no public market. Plan to hold for the full life of the investment, often several years or longer, with no assurance of an early exit.
• Loss of principal. Real estate values can fall. You can lose some or all of your investment.
• Distributions are not guaranteed. Distributions may be paid, but they can be reduced or suspended if tenants leave, rents fall or expenses rise.
• Reliance on the sponsor. You have no say in day-to-day decisions. Results depend on the sponsor's and property manager's skill, financial strength and conflicts of interest.
• Debt. Loans magnify gains and losses. A DST generally can't borrow new money or renegotiate its loan except in limited circumstances, which can force hard choices if the property struggles or the loan matures in a weak market.
• Limited control. Investors can't direct the sale, the timing or the management of the property.
• Tax law change and tax risk. Section 1031, the estate and basis rules, and the IRS's treatment of DSTs under Revenue Ruling 2004-86 can change. If the structure fails to qualify, the exchange could be taxable.

DST offerings are available only to accredited investors and only through a private placement memorandum, which describes the risks and fees in full. Read it, including the use of proceeds and compensation sections, before deciding.

None of this is tax or legal advice. Confirm how your closing costs will be treated with your CPA or tax attorney and your qualified intermediary before you close.

Frequently asked questions

Can I pay my qualified intermediary's fee from exchange funds?

Generally, yes. Most tax advisors treat the QI fee as an exchange expense, similar to a commission or title fee, and the QI usually deducts its fee from the account at closing. It's typically reported as an exchange expense on Form 8824 and either reduces your gain or adds to the basis of the replacement property, depending on how your CPA treats it. Confirm the treatment with your CPA, but this is one of the least controversial items on the list.

Are loan fees on my replacement property taxable if paid with exchange money?

They may be. The prevailing view among tax advisors is that origination fees, points, lender title insurance and lender-required reports are costs of obtaining a loan, not costs of acquiring property, so paying them from exchange funds can create taxable boot. The usual fixes are paying them with your own cash at closing or having the loan amount cover them. The authority here is thin, so get your CPA's view before closing rather than after.

Do property tax prorations create boot?

It depends on who you ask, and that tells you how unsettled this is. Treasury Regulation §1.1031(k)-1(g)(7) lists prorated taxes among transactional items a QI can pay without breaking the safe harbor, and many advisors are comfortable with that. Others treat proration credits as operating items. The dollar amounts are usually small. Ask your CPA which approach they use and make sure the closing statement matches it.

Can I deduct 1031 exchange closing costs on my tax return?

Not as a current deduction in the usual sense. Selling costs reduce your amount realized, which lowers the gain you defer, and purchase costs are added to the basis of the replacement property, which you depreciate over time. Loan costs are generally amortized over the life of the loan. Form 8824 is where exchange expenses get reported. The benefit shows up through lower gain and higher basis rather than a line-item deduction.

What is a typical load on a DST?

It varies widely from offering to offering, and I won't quote a typical number because the right figure is the one in the PPM you're reading. What I'd do is compute it yourself from the Estimated Use of Proceeds table: add up everything that isn't the purchase price or reserves, and divide by the equity raised. Then read the compensation section for ongoing and disposition fees, which the table doesn't show.

Is the DST load charged on top of my investment?

No. You invest, say, $500,000, and you own interests bought at $500,000 of offering price. The load is paid out of the offering proceeds, so it reduces how much of the trust's money goes into real estate. That's why the day-one equity value calculation matters: it shows how much net asset value backs each dollar you invested before the property appreciates.

Who pays transfer tax in a 1031 exchange?

The same party who would pay it in any sale, which depends on local custom and your contract. In much of California the seller pays the county documentary transfer tax, and city taxes follow city rules or negotiation. The exchange doesn't change who pays. Transfer tax on the sale is generally treated as an exchange expense, so it can come out of the proceeds without creating boot.

Should I avoid a 1031 exchange if the fees seem high?

Run the numbers first. On a direct property exchange, the only added cost is usually the QI fee, and it's almost always small next to the tax. The comparison gets closer when the replacement is a high-load product and your gain is small. If the load exceeds the tax you'd defer, an exchange into that product may not make sense, and paying the tax or picking a different replacement deserves a look.

If you want a second set of eyes on a closing statement or a PPM's use of proceeds table, I'm happy to walk through the numbers with you, or you can request access to the investor portal.

Sources

• 26 CFR §1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)
• 26 CFR §1.1031(d)-2, Treatment of assumption of liabilities (Cornell LII)
• IRS Instructions for Form 8824, Like-Kind Exchanges
• IPX1031, Closing Costs and the Tax Deferred Exchange (discussing Rev. Rul. 72-456 and Reg. §1.1031(k)-1(g)(7))
• Lorman, Exchange Expenses: How to Find the Hidden Boot in a 1031 Exchange
• PG Calc, Indexed Tax Tables for 2026
• Greenberg Traurig, San Francisco's BUILD Act: Proposed Transfer Tax Reductions (2026)
• Reed Corp, LA Measure ULA: No Reform, July 2026 Thresholds
• SEC EDGAR, Form D filings (sales commissions and use of proceeds items)
• IRS Revenue Ruling 2004-86, Delaware statutory trusts (Internal Revenue Bulletin 2004-33)