The Importance of the Settlement Statement in a 1031 Exchange

In a 1031 exchange, the settlement statement should document all the details of your particular exchange. Have the parties sign it and ratify their approval and, most importantly, spell everything out so that it’s clear as day. Make the accountant’s job easy by itemizing in great detail. When possible, have the taxpayer bring in cash from their own pocket to cover operational expenses (such as prorated rents and security deposits).

That’s an ideal 1031 exchange scenario. But the reality is that some taxpayers conducting 1031 exchanges are cash poor. It’s easy for these taxpayers to have selective amnesia when they get their tax bill and realize that they are going to be taxed on the security deposits and other expenses that they pocketed. It’s important to understand that siphoning off your exchange funds to pay non-qualified expenses can trigger some gain.

A savvy CPA or tax attorney may recommend that you reinvest all of your equity and do a super clean 1031 exchange. Later, in a subsequent transaction, the taxpayer may refinance the replacement property to access their equity post-exchange. When you borrow money and you have a corresponding obligation to repay that loan, it’s not taxable income. So you can get your hands on the same amount of cash if you’re patient and you delay your gratification.

1031 Exchange Services in Minnesota & Beyond

CPEC1031, LLC offers 1031 exchange services throughout Minnesota, as well as the entire United States. If you are a US taxpayer looking to defer your capital gains taxes on the sale of investment real estate, a like-kind exchange may be the best course of action for you. Reach out to the qualified intermediaries at CPEC1031, LLC today at our offices in downtown Minneapolis to learn more about the like-kind exchange process and see how we can help you through the specifics of your next exchange of real estate.

 

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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