The short answer
You pay it: the intermediary works under your exchange agreement, so the fee is your exchange expense, not the buyer's or the seller's on the other side. It can be paid from the sale proceeds at the relinquished closing or out of the exchange account later, because Reg. Section 1.1031(k)-1(g)(7) disregards transactional items that appear on typical closing statements when it tests whether you received money. On Form 8824 the fee then reduces the cash you are treated as receiving, and anything it does not absorb goes into the basis of your replacement property.
At a glance
| Whose expense | The exchanger's, under the exchange agreement |
|---|---|
| Paid from exchange funds | Permitted without breaking the money restrictions, as a transactional item |
| Where it shows | A line on the settlement statement, or a disbursement the QI makes later |
| Form 8824 line 15 | Exchange expenses reduce cash and net debt relief received |
| Form 8824 line 18 | Unused expenses add to basis in the replacement property |
| Fee netted from earnings | Counts as paid to you only if fixed before the sale and owed regardless of earnings |
| Buyer's cost | Cooperation clauses usually limit the buyer to signing, at no cost to the buyer |
The intermediary is your contractor, so the fee is your exchange expense
A qualified intermediary is defined in Reg. Section 1.1031(k)-1(g)(4)(iii) as a person who enters into a written exchange agreement with the taxpayer. The buyer of your old property and the seller of your new one are not parties to that agreement; they are only asked to accept an assignment of the contracts.
That is why a cooperation clause in a purchase contract typically says the other side will cooperate at no cost or liability to it. Whether you need one, and how it should read, is in the exchange cooperation clause.
Nothing in the regulations stops you from negotiating a price that reflects the fee. That is a pricing decision, not a shift of the fee itself, and the fee stays on your side of the closing statement.
Paying it from the exchange account does not count as receiving the money
The safe harbors depend on your having no right to receive, pledge, borrow or otherwise benefit from the money before the exchange period ends. Paragraph (g)(7)(ii) sets aside 'transactional items that relate to the disposition of the relinquished property or to the acquisition of the replacement property and appear under local standards in the typical closing statements as the responsibility of a buyer or seller', with commissions, prorated taxes, transfer taxes and title company fees as examples.
An intermediary's fee for the exchange in which those closings occur fits that description, which is why it is commonly charged as a line on the relinquished settlement statement or deducted when the intermediary funds the replacement closing. The broader list of costs that can and cannot be paid this way is in closing costs paid from exchange funds.
The regulation on exchange funds adds one wrinkle. Under Reg. Section 1.468B-6(b)(4)(ii), the facilitator's fee is a transactional expense for that section only if the agreement fixes the amount on or before your sale, as a dollar figure or a formula, and makes it payable whether or not the earnings on your funds cover it.
On your return, the fee first shrinks boot and then becomes basis
The Instructions for Form 8824 tell you to reduce the line 15 total of cash received, other property and net liabilities assumed 'by any exchange expenses you incurred', but not below zero. Line 18 adds exchange expenses not used on line 15 to the adjusted basis you carry forward.
So the fee is never a current deduction, but it is never wasted either. Where you received some cash, it cuts the taxable boot dollar for dollar. Where you received none, it raises the basis you will depreciate. The detail is in exchange fees: deductible or basis.
A hypothetical: the fee on the statement versus out of pocket
Hypothetical figures: you sell for $700,000, the intermediary receives $660,000 after $40,000 of commissions and closing costs, and you buy a $650,000 replacement with $5,000 of purchase-side closing costs, all paid from the exchange account. The intermediary's fee is $1,200, also paid from the account, and the $3,800 left over is paid to you after the exchange ends.
Line 15 starts with the $3,800 of cash and subtracts exchange expenses: the $40,000, the $5,000 and the $1,200. Line 15 cannot go below zero, so recognized gain is zero, and the $42,400 of expenses not used there moves to line 18 and raises the basis of the replacement. Had you paid the fee by personal check, the treatment would be the same, but $1,200 more would have reached you as cash. Run your own numbers with your CPA.
Settle the fee before the first closing, in writing
Read the fee section of the exchange agreement before you sign: the base fee, any charge per replacement property or per wire, and whether the fee comes out of earnings on your funds. Then ask the settlement agent to show the fee as its own line, payable to the intermediary, so the expense is documented for your preparer. The other documents to collect are in the settlement statement for a 1031.
If the agreement keeps the earnings in exchange for a lower or zero fee, see interest on exchange funds. If your replacement is a Delaware Statutory Trust interest, the intermediary wires your funds to the offering's escrow and its fee is handled the same way.
Related questions
Can the buyer pay my intermediary fee?
Only by agreement, and a buyer who pays it is effectively paying you more for the property. The fee remains your exchange expense for Form 8824 purposes.
Is the intermediary fee deductible on Schedule E?
No. It is an exchange expense that reduces boot on line 15 of Form 8824 and adds to replacement basis on line 18.
What if the exchange fails after the fee is paid?
The fee is then a selling expense of a taxable sale, which reduces the gain you report. Agreements differ on whether any of it is refunded.
Can the intermediary take its fee out of the interest it earns?
Yes, if the agreement says so. Under Reg. Section 1.468B-6 the netting is treated as paid to you only if the fee was fixed before your sale and owed regardless of earnings.
Does a reverse or improvement exchange change who pays?
No, but the bill is larger because a titleholder has to own property. See improvement exchange cost.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.