What Real Estate Investors Need To Know About 1031 Exchanges Fees

by Jaden L. Parkino

When closing on the sale of a property, you will likely incur a variety of expenses, and you may find yourself wondering what is and isn’t acceptable to debit off your closing statement. This is particularly important when you are making a 1031 exchange.

These sorts of expenses don’t seem to fit on your typical closing statement, and for good reason. Some costs are appropriate to debit off your closing statement during a 1031 exchange transaction, and there are some that most certainly are not.

The correct way to deal with these is to write the owner a check from your own operating account. Debiting these expenses to your closing statement would result in a cash benefit in that money in your operating account would be freed for your use, and this money is considered to be boot.

Section 1031 operates under the assumption that the investor is transferring the entirety of the equity on the sale property to the replacement. It is unacceptable to debit expenses such as rent proration or security deposits to the closing statement as that frees money in your operating account for your use. Any cash benefits or proceeds that you receive in this context are referred to as boot, and because they are not part of a like-kind exchange are taxable.

The message you should take away from this article is that it is best to simply pay these kinds of expenses out of your own account rather than making a risky attempt to walk out of a 1031 exchange with extra cash in your pocket. The IRS has pursued litigation against investors who have tried these kinds of tactics, one notable example being the case of the Commissioner v. Garcia.

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