Can I Pay my Legal Fees out of the Sales Proceeds in a 1031 Exchange?

1031 Exchange Legal Fees

Many people ask if they can pay their legal fees out of the proceeds from the sale of their old relinquished property in a 1031 exchange.

Fees Related to Your 1031 Exchange

The answer to the question is yes, if the legal fees relate to your 1031 exchange or relate to the real estate matter. However, you can't pay unrelated legal fees out of the 1031 sales proceeds. For example, if you were doing estate planning or had a criminal action unrelated to your 1031 exchange - those cannot be paid out of the net proceeds. You can’t pay legal fees unrelated to your transaction.

Treasury Regulations

The treasury regulations state that you can pay ordinary, standard, customary transactional expenses out of the exchange funds and certainly your legal fees related to the exchange are ordinary and customary.

  • 1031 Hotline: If you have questions about legal fees associated with your like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Like-Kind Exchange Deed & Transfer Tax

Like-Kind Exchange Deed Tax

In a reverse 1031 exchange, the qualified intermediary forms an entity that acts as a straw man to acquire the replacement property.

Exchange Accommodation Title-Holder

That straw man is called an Exchange Accommodation Title-Holder (EAT). This EAT typically holds title to the replacement property until the old relinquished property is disposed of and then the EAT (or straw man) deeds the property to the exchangor to complete their like-kind exchange.

The sad situation is that the Exchange Accommodation Title-Holders already paid deed tax pid once when it received the parked property from the seller and now is being subjected to transfer tax again when the replacement property is deeded to the exchangor.

State Differences

Some states are very aggressive in taxing the transfer of the parked replacement property to the exchangor in what’s called deed tax or transfer tax. Not all states are as aggressive as say Pennsylvania or Wisconsin in collecting deed tax from the intermediaries entity to the exchangor. 

In Minnesota, the Minnesota Department of Revenue has been much more accommodating in limiting the transfer tax to the value of the exchange services provided by the exchange accommodation title holder. Other states are imposing the transfer tax on the entire value of the property being conveyed.

  • 1031 Hotline: If you have questions about deed tax or transfer tax 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

How Much Lead Time Does the Title Company Need in a 1031 Exchange?

Title Company Lead Time

If you're thinking about doing a 1031 exchange, you don't want to drop that bombshell on your title company the eve of the closing. How much lead time should you give your title company in a 1031 exchange?

Don't Wait Until the Last Minute

By waiting until the eleventh hour when everyone's already got their documents set up and prepared in a certain fashion, if you throw a curve ball and tell them that you want to do a 1031 exchange at the last second it's going to create some drama and disruption for a lot of parties involved in the transaction.

The best advice is to get your 1031 exchange set up with the intermediary well in advance of the closing so that the closer is aware of what's needed and can get the extra 1031 documents circulated and signed by all of the parties well before the closing.

Smooth Closing Process

We still get calls from the closing table from folks that didn't know that they needed to get their 1031 set up in advance. We can have a fire drill, prepare the documents quickly and get them out when needed, but my advice is to take the time and get it set up well in advance so that you have a smooth signing ceremony rather than a chaotic closing.

  • 1031 Hotline: If you have questions about 1031 exchange lead timing, 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 Accelerating Deductions & Deferring Gains on Real Estate

Real Estate Depreciation

If you want to become financially successful your first job is to learn how to acquire a lot of money. The next job that you have is to manage your tax liability.

Accelerate Deductions & Defer Gains

To do that you want to accelerate deductions and defer gains. What's the perfect vehicle to accelerate depreciation deductions and to defer gains?

The perfect vehicle is real estate - particularly improved multifamily real estate. With an apartment building you're allowed to take a deduction each year for the theoretical wear and tear or wasting of your building. When in fact the property may be going up in value you're taking a write off on your taxes (what we call a non-cash loss) because of the theoretical wear and tear or depreciation.

Depreciation Deduction

That depreciation deduction can be used in particular by real estate professionals to offset and lower their taxable income from other sources. So real estate agents and other real estate professionals have almost an uncapped amount of losses that they can use against the earned income to make their tax liability as low as possible.

  • 1031 Hotline: If you have questions about real estate depreciation, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What is a Third-Party Administrator in a 1031 Exchange?

Third Party Administrator

The treasury regulations have various safe harbors for 1031 exchanges. One of these is the qualified intermediary (or QI) safe harbor. The qualified intermediary acts as a neutral third party administrator unbeholden to the taxpayer to facilitate or administer The 1031 exchange.

What a Third-Party Administrator Does

The third-party administrator typically prepares the 1031 documents, provides instructions to the settlement agent, and most importantly holds the proceeds from the relinquished property so that the taxpayer or exchangor does not have any actual or constructive receipt of the net proceeds or 1031 funds.

Who Can be Your 1031 Third-Party Administrator?

The regulations in the Internal Revenue Code prohibit the administrator from being anyone that has in the last two years been an agent or employee of the taxpayer. So your attorney, your account, and your employees are all disqualified from acting as your administrator. Also, related parties such as your mother, or your son, or other relatives are excluded or prohibited from acting as your 1031 third-party administrator. The idea is that the qualified intermediary should be unbeholden, unrelated, and acting independently of the taxpayer or exchangor doing the exchange.

  • 1031 Hotline: If you have questions about the role of the third-party administrator 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