There are various items on a typical 1031 exchange closing statement. Many people have questions about whether various operational expenses can be paid using 1031 exchange funds. In this article, we are going to discuss why you need to be extra careful when paying operational expenses in a 1031 exchange.
Operational Expenses
You have to be careful when paying operational expenses (like prorated property taxes) using your 1031 exchange funds. You’re going to pay your property taxes whether you sold the property or not. That tax bill is coming no matter what and it creeps into the settlement statement because you have to settle up between the buyer and seller and prorate each party’s share.
Siphoning off your 1031 exchange proceeds to pay such operational expenses is going to trigger gain because you took some of your cash equity from the sale of the relinquished property and you didn’t reinvest it into the replacement property. Instead, you used it to pay for a non-qualified operational expense.
The safest way to handle this and protect your 1031 exchange is to pay all of your transactional expenses out of pocket.
1031 Qualified Intermediary Services
CPEC1031, LLC provides qualified intermediary services to taxpayers conducting 1031 exchanges in Minnesota and across the United States. Our team facilitates exchanges of all types of qualifying real property – from apartment complexes to retail buildings. No project is too large or small. Realize the tax-saving benefits of a like-kind exchange today by reaching out to our 1031 exchange intermediaries and see if your property is a good fit for like-kind exchange treatment. Reach out today to set up an appointment with our team of intermediaries and start deferring your capital gains 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.
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