How To Close Real Estate Expenses With A 1031 Tax Exchange

By Brian J. Scott

The closing of a sale on real estate property involves a number of expenses that may draw off from your proceeds and reflect themselves on the closing statement. Some of these are the standard operating expenses or the ones used for your agent's commission and the recording of the deed. But during the proceedings, additional expenses may also arise like security deposits and rent proration.

These types of expenses do not form part of the closing statement. Transactions on 1031 exchange allow some expenses to be debited on your closing statement. However, some costs are inappropriate to be included so.

In changing ownership, you also transfer future rent and security deposits to the property's new owner. Getting the amount from your own account to cover said expenses can be the most suitable way to deal with this. You can not debit said expenses from your closing statement because in the process, you are freeing money from your account and using 'boot' from the transaction's proceeds.

Taking away boot or sale proceeds has caused many investors to be pursued by the IRS for judicial proceeding. Cash benefits or boot from the sale of a property is not part of a like-kind exchange.

In the process of a 1031 exchange, you will also face expenses related to the acquisition of new debt on your replacement property. Loan origination fees, underwriting fees, and processing fees are not part of a like-kind exchange and the money must come out of your own property.

What this article would like to leave you is that as an investor, you need to be very careful in your closing transactions. The IRS looks closely into these kinds of transactions and your receipt of cash benefits from 1031 exchanges can have its drawbacks. - 23167

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U.S. investors can save big money by using a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from Uncle Sam.