What Title Closers Should Know About Closing Costs & 1031 Exchanges

Many closers are put in an uncomfortable position because taxpayers have all kinds of credits and debits on their closing statements and the closer is asked if these expenses are permitted transactional expenses that may appear on a closing statement. The closer doesn’t have the tools to answer these questions.

Big Picture

Let’s talk really big picture. On the sale of the relinquished property the taxpayer wants to move all of their equity into their new replacement property. The taxpayer is allowed to pay out of the net proceeds certain transactional expenses like:

• Realtor commissions

• Attorney fees related to the exchange

• Recording fees

• State deed tax

But sometimes the taxpayer wants to put an oddball expense on the closing statement like a bill from home depot or other expenses unrelated to the transaction. Those oddball expenses that wouldn’t normally appear on a closing statement should ring an alarm bell.

The other expenses that might need to be addressed are debits for security deposits, rent proration, and property taxes.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - Can You 1031 Exchange Foreign Property?

Interestingly, foreign property cannot be 1031 exchanged for US property. The code specifically says that foreign property is not like-kind to US property. But remember, US taxpayers are taxed on their gains from wherever they’re derived, including foreign transactions. So if you’re a US taxpayer selling foreign real estate you can still do a 1031 exchange on your foreign real estate, but you can’t exchange into the US. So you would have to do a foreign property to foreign property exchange. For example, if you sold a property in the UK you could buy your replacement property in Canada or Mexico, but you could not buy the replacement property in Minnesota because the US property would not be considered like-kind to the UK property.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Essential Things to Keep in Mind When Doing a 1031 Exchange with a Contract for Deed

Some taxpayers completing 1031 exchanges are buying replacement properties from sellers with “seller-backed financing,” such as a contract for deed. Furthermore, this contract may be inconvenient to record because this conveyance of equitable title by contract for deed may violate the sellers existing bank financing agreements which is sometimes referred to as the “due on sale clause.” These provisions in the loan agreement and mortgage, often prohibit any convenience or transfer of the banks collateral without first paying off the debt owed to the bank. 

Minnesota requires that the contracts for deed be recorded in a timely fashion, and imposes both potential criminal and civil penalties for failure to record.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - Be Careful with Related Party 1031 Exchanges

In a 1031 exchange you generally want to avoid related party transactions (buying and selling with related parties). It becomes more murky and uncertain when you’re buying from a related party. So if you can avoid a related party transaction, do it. Try not to buy from a related party. That said, we do facilitate related party transactions. In those cases we add a disclosure to our 1031 documents talking about the additional complexity and requirements when you’re doing a related party transaction.

Form 8824, which is the IRS worksheet that you attach to your tax return to report a 1031 exchange, asks if you bought or sold property from a related party. Further, it requires you to give a written narrative of why your related party transaction isn’t part of a scheme to avoid the imposition of tax, and why it is permissible to do what you’re doing. There can also be a two year holding period applicable to you and the related party that you dealt with.

Related party transactions are definitely more complicated and do create a certain degree of uncertainty because of the harsh and difficult way that the IRS has applied these rules to small mom and pop investors.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - How to Do Your Due Diligence on Qualified Intermediaries

When you do a 1031 exchange you want to do your due diligence on your qualified intermediary because you’re going to be entrusting them to hold your proceeds and to prepare the paperwork necessary to complete the 1031 exchange. So you want to work with a reputable outfit. Here are a few questions you’ll want to ask of your qualified intermediary:

• Do you have errors and omissions insurance?

• Do you have professional liability insurance?

• Do you have separate, segregated accounts?

• Do you have a qualified escrow deposit agreement in place where the bank is going to be the gatekeeper to authorize the disbursement of your funds?

At CPEC1031, we have all of these items and more to safeguard your exchange. All of this is part of a plan to make sure the client can sleep at night. If necessary we can even build additional safety and security protocols if you have massive transactions.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved