Yes, there are costs associated with a 1031 Exchange. When you sell an investment property and choose to initiate an IRC 1031 tax-deferred exchange, you will encounter specific closing costs. These expenses can be categorized as either allowable or unallowable. Under §1031, if you pay necessary closing costs during the transaction, these costs can reduce the amount you must spend on the replacement property.
Allowable Exchange Expenses
Allowable expenses include commissions paid on the sale. According to Revenue Ruling 72-456, brokerage commissions reduce the realized and recognized gain. While there is no direct authority on the deduction of other costs, Private Letter Ruling (PLR) 8328011 suggests that the following expenses, listed as “exchange expenses” on IRS Tax Form 8824, are typically considered allowable:
- 1031 Exchange or Accommodator fees
- Messenger fees
- Escrow, processing, and statement fees
- Finder fees
- Tax service fees
- Inspection and testing fees
- Notary and recording fees
- Brokerage commissions
- Title insurance premiums
- Documentary transfer taxes
- Legal or consulting fees related to the transaction
These costs generally help facilitate the exchange process and are widely accepted as valid exchange expenses.
Expenses Considered Boot (Taxable)
Alongside allowable expenses, there are certain costs classified as Boot, which are taxable. For instance, any security deposits or rents transferred to the buyer fall into this category, as well as:
- Utilities
- Property taxes
- Property insurance
- Association dues
- Repairs and termite work
- Credits to buyers for non-recurring closing costs or repairs
- Loan acquisition fees, such as points, mortgage insurance, application fees, lender’s title insurance, assumption fees, and required inspections for hazardous materials or property conditions.
It is important to understand that these expenses are taxable and may affect your overall tax liability during the exchange process.
Final Thoughts
Although the guidance on exchange expenses is somewhat limited, it’s crucial to consult with your tax advisor to ensure proper handling. Furthermore, reaching out to us as your Qualified Intermediary will provide you with the guidance needed to navigate 1031 Exchange fees and expenses effectively.
Old Republic Exchange | Old Republic Insurance Group
C: 480.341.2032
E: SheilaL@oldrepublicexchange.com
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com. Let us help you stay ahead in the market!