Regarding earnest funds and closing costs, can you use 1031 exchange funds to pay for them? If you cut a check for earnest money, will the 1031 exchange funds credit you back? Many taxpayers have questions like this as they try to project out the down payment percentages with the lenders and also in preparation of writing offers. That’s our topic for this article.
Earnest Money & Transactional Costs
Yes, you can pay earnest money and transactional costs associated with the closing of the acquisition of the property out of exchange funds. If you advance earnest money out-of-pocket, we can have that deposit returned to you at the time of closing. If it’s non-refundable earnest money, though, which either leaves or bypasses the closing escrow, we would need the seller to be amenable to sending it back to the title company; we can’t reimburse you out of exchange funds during the exchange period.
Please note that costs related to obtaining loans – including good faith deposits and down payments – are generally treated as distinct from the costs of obtaining the property and should not be funded out of the exchange; doing so could trigger some recognition of gain.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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