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How to Account for Fees Associated with your 1031 Transaction

1031 Exchange Fees

Many taxpayers who are in the middle of a 1031 exchange have questions about how to account for fees associated with the 1031 transaction.

Specifically, can any of the following be included on the settlement statement?

  • Lender Legal Fees
  • Appraisal Fee
  • Appraisal Review Fee
  • Flood Certification

Fees that Cannot be Paid with Exchange Funds

On the closing of the replacement property certain fees associated with the new loan may not be paid with exchange funds without potentially triggering the recognition of gain (which would result in a failed 1031 transaction).

Any lender required expense ideally would be paid for out-of-pocket and not out of the 1031 exchange proceeds. These include: 

  • Lender Legal Fees
  • Appraisal Fee
  • Appraisal Review Fee
  • Flood Certification

It is not a good idea to put these on the 1031 exchange closing documents. Pay these fees out of pocket, and keep your 1031 funds away from them in order to protect your 1031 exchange. Take a look at our previous article for closing costs that can be paid with 1031 funds.

  • 1031 Hotline: If you have questions about how to account for 1031 exchange fees, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Things to Know About Bank Financing in a 1031 Exchange

1031 Loan Documents

Many taxpayers conducting a 1031 exchange have questions about bank financing in a 1031 exchange transaction. Here are a few tips and things to know when it comes to bank loans and 1031 exchanges.

Bank Loan Agreement

The banks’s loan agreement may require the exchangor (through the intermediary) to exhaust the 1031 funds for the purchase of the replacement property and for the first construction draws before the banks loan funds will be disbursed. The bank cannot take a security interest in the 1031 funds held by the intermediary.

The taxpayer conducting the exchange may co-sign or provide a personal guarantee of the bank’s loan.

The ‘due on sale clause’ in the loan may need to be modified to allow for the transfer of the replacement property to the exchangor during the 180 day exchange period.

Depending on the number of exchangors, the 1031 exchange may be completed by:

  1. deeding the replacement property from the LLC to the exchangors (with a corresponding mortgage assignment/assumption); or
  2. by the intermediary assigning 100% of the membership interest in the LLC to the exchangor (which may negate the need for a formal mortgage assignment/assumption).

Items to Request

In a 1031 exchange with bank financing, you should request the following items:

  • Prior Exchange Documents. Copy of the signed relinquished property 1031 documents from the sale with confirmation of the amount of funds held by the intermediary (we need to confirm who and how the old relinquished property was vested in title). The 1031 identification of replacement property should include a description of the new land plus the to-be-built improvements.
  • Fresh LLC to hold title to the Replacement Property. Copy of the LLC articles, certificate of organization, operating agreement and authorizing resolution appointing the officers (this LLC will likely be 100% owned by the intermediary);
  • Title Commitment for the new Replacement Property.

The loan documents may need to be modified to limit the liability of the intermediary.

    • 1031 Hotline: If you have questions about bank financing in a 1031 exchange, feel free to call me at 612-643-1031.

    Defer the tax. Maximize your gain.

    © 2017 Copyright Jeffrey R. Peterson All Rights Reserved

    Exchanging into 1031 Properties of Equal or More Value

    1031 Property Values

    1031 Exchange Question: should you consider exchanging into one or more properties so you have continued investment into properties of equal or more VALUE?

    Getting the Most Tax-Efficient Outcome

    To get the most tax-efficient outcome, you may want to take on some more debt and buy more than you ordinarily would. One trick is to go into investments with non-recourse debt (that you are not personally liable for) to get to the requisite value, but without the personal liability.

    3 Rules of Thumb for 1031

    There are three general rules of thumb (also known as the napkin test) to quickly see if you will defer ALL of the recognition of gain.

    1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}
    2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.
    3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

    You can have a partial tax deferral if you miss these general benchmarks. A 1031 exchange is not an all or nothing deal, and you can complete a partially tax deferred exchange; but you will probably recognize gain to the extent that you buy down in value.

    Check out this video related to the topic:

    Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

    • 1031 Hotline: If you have questions about full vs. partial exchanges, or anything regarding 1031, feel free to call me at 612-643-1031.

    Defer the tax. Maximize your gain.

    © 2017 Copyright Jeffrey R. Peterson All Rights Reserved

    Tips for Exchanging 1031 Property as an LLC or Partnership

    Partnership 1031 Exchange

    Consider the following 1031 scenario: A seller owns a single-family home with a friend of theirs in a partnership. Can one of the partners owning that single-family home do a 1031 exchange and buy another rental property? That's our topic for today's 1031 education article.

    Who is the Taxpayer?

    The question really comes down to "who is the taxpayer that has held title to that old single family home?"

    • Is it an entity such as a partnership or LLC?
    • Or is it the two individuals owning as tenants-in-common?

    If they are in fact in a partnership or business entity, it may be necessary to reconfigure the ownership so that the old entity now owned solely by the surviving taxpayer that wants to do the exchange holds title to its portion of the property, and the other partner is redeemed out of the partnership and takes a tenant-in-common interest in a portion of the underlying property.

    Planning Opportunities

    These are planning opportunities and it's nice to get in front of the deal well before the sale of the relinquished property. For more information on this see, our whiteboard video related to this topic.

    • 1031 Hotline: If you have questions about 1031 exchange depreciation recapture, or anything regarding 1031, feel free to call me at 612-643-1031.

    Defer the tax. Maximize your gain.

    © 2017 Copyright Jeffrey R. Peterson All Rights Reserved