Can you be reimbursed for expenses paid during your 1031 exchange from the qualified intermediary? That’s a very common question that many taxpayers have when conducting 1031 exchanges of real estate.
Transactional Expenses
Let’s say that during the 1031 exchange process, you had expenses for surveys, appraisals, or other items that you paid for out of your own pocket. Is it possible to get reimbursed for these expenses from the qualified intermediary?
The gain that a person recognizes on a 1031 exchange would be equal to the gained deferral or the boot received (the lesser of the two). If an individual is putting money into their exchange and taking money out of that exchange, you can net those funds for certain transactional expenses.
Here’s how a lot of taxpayers approach this. They have a duplex they want to sell and they spend $12,000 touching up the duplex and getting it ready for sale. When the duplex sells, they want to reimburse themselves for the $12,000 that they had paid in repairs to get it ready for sale. That's where people can get a bit greedy when they want to reimburse themselves for all these expenses.
The Better Play
The better play is to only pay transactional costs that are customarily seen in that locality. If you have an attorney's bill, and accountant’s bill, a real estate agent’s bill, recording fees, etc. – those are the kind of expenses that would be permissible to pay out of the 1031 exchange proceeds.
It is a good idea to involve your attorney and accountant as early in this process as possible. As you can see there are a lot of potential landmines you can step on during a 1031 exchange. Involving your team of professionals as early as possible is the best way to ensure the success of your 1031 exchange.
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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