What Closing Costs May be Paid as Part of a 1031 Exchange?

closing costs in a 1031 exchange

You may use your 1031 funds to pay certain customary “transactional items” that relate to the disposition of the relinquished property or to the acquisition of the replacement property and that appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g. commissions, prorated taxes, recording or transfer taxes, and title company fees).

Oddball Fees

Because there is potential for ambiguity as to what is a customary or qualifying transactional item, oddball fees and questionable transactional expenses that may not customarily be paid as part of a closing in the locality where the properties are located, should be paid out-of-pocket (not from the 1031 funds) to eschew any potential challenge.

From the IRS

Page 12 of IRS publication 544 states that:

Exchange expenses are generally the closing costs you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Subtract these expenses from the consideration received to figure the amount realized on the exchange. If you receive cash or unlike property in addition to the like kind property and realize a gain on the exchange, subtract the expenses from the cash or fair market value of the unlike property. Then, use the net amount to figure the recognized gain.

Your qualified intermediary probably cannot be 100% sure that ALL of your transactional expenses will qualify to be paid from the 1031 funds. However, I suspect that your CPA or accountant will have a much better feel for what is a permitted typical cost or what is a qualifying expense.  After all, your CPA or accountant is the person who will actually sign-off on your tax return and they probably know your specific tax-situation better than anyone else.

  • Start Your 1031 Exchange: If you have questions about closing costs in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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