A 1031 exchange supports tax deferral—but it still incurs fees, including escrow charges. Escrow fees cover the cost of securing sale proceeds in a neutral account managed by your qualified intermediary to preserve the tax-deferred status. Typically ranging from 1–2% of the property value, these fees are classified as exchange-related closing costs—which reduce your reinvestment requirement, rather than being independently deductible. Realized 1031 shares a clear guide below explaining how escrow fees work and their impact on your exchange.
Escrow 101: What You Need To Know
Escrow is a financial arrangement where a neutral third party holds funds or assets on behalf of two parties involved in a transaction. The escrow agent is responsible for safeguarding these assets until predefined contractual conditions are met, at which point the assets are disbursed according to the terms of the agreement. This mechanism provides a layer of protection and operational integrity for all involved parties, particularly in transactions involving significant sums or contingent obligations, such as mergers and acquisitions, securities offerings, and real estate purchases.
Escrow Fee in a 1031 Exchange Context
In the context of 1031 exchanges, escrow takes on one more role: to ensure that the investor won’t have direct control of the proceeds. Why is this necessary? The IRS has set strict rules surrounding 1031 exchanges to prevent abuse. Among the most important factors for maintaining the tax-deferred status is that the investor cannot have direct control of the proceeds from the sale of the relinquished property. To satisfy this requirement, the qualified intermediary will hold the funds in an escrow account.
In most cases, the qualified intermediary will partner with a third-party entity to establish the 1031 exchange escrow account, such as banks or dedicated escrow companies. These companies are providing a service when creating these accounts. As such, the escrow fee exists as payment for this service. The escrow fee covers steps like the following.
- Administrative tasks (handling funds, preparing documents, disbursing payments)
- Communication with the qualified intermediary, title company, and closing agents
- Compliance oversight over timelines and safe‑harbor conditions
- Maintaining fund security and segregation
How Much Is the Average Escrow Fee?
Escrow fees in a 1031 exchange vary based on the property type and complexity of the exchange. For typical residential transactions, total fees (including Qualified Intermediary services) tend to range from $600 to $1,200, with escrow charges alone often falling between 0.1% and 0.5% of the property’s value. In larger commercial exchanges, escrow provider fees can reach 1–2% of the transaction value.
Are Escrow Fees Tax-Deductible in a 1031 Exchange?
Yes. Escrow fees incurred in a 1031 exchange are generally considered “exchange expenses” and can be paid using the exchange funds (the proceeds from the sale of the relinquished property). These fees effectively reduce the amount that must be reinvested to maintain full tax deferral. If exchange proceeds are used to pay for non-exchange expenses (e.g., loan origination, prorated taxes), that may generate taxable boot, which could trigger partial recognition of gain. Even so, make sure to consult with your qualified intermediary or tax consultant to receive guidance regarding what is allowed as a deduction.
Final Thoughts: 1031 Exchange Escrow Fee
Escrow fees in a 1031 exchange cover the costs of securing and disbursing sale proceeds through a third party. While complex commercial deals may incur fees up to 1–2% of the property value, most exchanges involve flat fees or charges between 0.1% and 0.5%.
These fees are typically considered exchange expenses and can be paid from exchange proceeds without affecting tax deferral. Always consult your Qualified Intermediary or tax advisor to ensure compliance.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.rocketmortgage.com/learn/escrow-fees
https://www.forbes.com/advisor/mortgages/real-estate/1031-exchange/
