How to Handle Items on the HUD Statement in a 1031 Exchange

Earnest Money Deposits Like-Kind Exchange

Many taxpayers who are engaging in a like-kind exchange have questions about how certain items on the closing statement should be handled. In this article, we're going to take a look at some of those common closing items and how they should be addressed from a 1031 exchange point of view.

Items on the HUD Statement

Here are a few items that generally appear on the HUD statement and how they should be handled in a 1031 exchange transaction:

  • Earnest Money - The original earnest money funds should come from the exchange as part of the purchase price and be paid back.
  • Broker's Credit should be returned at closing.
  • Accrued Rental Income should be returned at closing.
  • Property Tax Credit should be paid back for a property tax escrow account or prepaid to the County.

A Note on Earnest Money

It is OK to return the earnest money, but it is important to take steps to make sure it can't be misunderstood as exchange funds coming into the taxpayer's hands (boot). The best way to do this is to show a debit line item on the settlement statement as "Return of Earnest Money Deposit."

  • 1031 Hotline: If you have questions about earnest money deposits or other items on the closing statement in a like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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