Closing Costs in a 1031 Exchange
Closing Costs in a 1031 Exchange
By: Shannon Kinnard
When navigating a 1031 exchange, it’s important for investors to know how to handle closing costs and other expenses. Routine transactional costs associated with the sale of the relinquished property and the acquisition of the replacement property can often be paid from the exchange funds. However, there are certain costs which may result in a taxable event so it’s crucial for investors to work with their Qualified Intermediary and tax advisor to discuss their specific expenses.
Common Permissible Expenses:
- 1031 Exchange Fees and Closing Agent Fees
- Legal Fees and Tax Advisor Fees
- Real Estate Broker’s Commissions
- Finder Fees and Referral Fees
- Title Insurance Premiums
- Real Estate Transfer Taxes
Common Non-Permissible Expenses:
- Loan Costs and Fees, including appraisals required by the lender
- Security Deposits and Prorated Rents
- Repairs and/or Maintenance Costs
Non-permissible expenses paid with exchange funds are considered taxable “boot”, but some taxable boot may be offset by other items. Determining whether certain expenses incurred during a 1031 exchange are allowable or not can be a complicated issue as it’s not always clear-cut. Investors should always consult with their legal and tax counsel prior to closing each leg of the exchange to address how to handle any expenses. Advisors may recommend that some costs are paid out-of-pocket by the investor to avoid creating taxable boot.
The 1031 exchange process can be complex, but strategic planning with your tax advisor and our team of experts at Genesis Bank Exchange can help maximize the potential of your investments. If you’re interested in learning more about the 1031 exchange process and how it may benefit you, connect with the Genesis Bank Exchange team by calling 800.797.1031, or explore further details on our website: https://www.mygenesisbank.com/1031Exchange.
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