When you're doing a 1031 exchange, the primary goal is to move all of your equity into the new relinquished property. But the exception to that rule is that you can use some of your exchange proceeds to pay customary transactional expenses that would appear in the sold property's locality.
Expenses that Can Go on the Closing Statement
So you can pay your broker commission, and your attorney fees that are related to the transaction. You can pay recording fees and title company charges. You can even pay your qualified intermediary fees. If a termite inspection is a customary transactional expense in the locality, then you can pay that as well on the closing statement.
Expenses that Should Not Go on the Closing Statement
Certain expenses should not be put on the closing statement from the 1031 exchange. For example let's say the seller wanted to put his credit card bill on the sale statement, thinking that “well I had to fix up the property to get it and I charged all of those repairs on my credit card so I think I'm going to pay my credit card bill on the closing statement.”
Well that is not contractually associated with the property and should not be paid on the settlement statement because it doesn't fit into what the treasury regulations require for debt that must be associated with the property, not just mentally but contractually required to have been paid as part of the closing.
Rent, Taxes, Security Deposits
Other transactional expenses that can gum up the works are rent prorations, security deposits, and tax prorations. Each of those items would probably be better paid out of the seller’s pocket rather than dipping into the sales proceeds. Remember, the idea is we want to move all of our equity - all of our net proceeds - into the new replacement property and items that are really operational expenses like taxes and deposits should be paid by the seller out of their operating account.
- 1031 Hotline: If you have questions about exchange expenses on the closing statement, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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