Closing Statement Best Practices in a 1031 Exchange

Let’s talk about some of the basics you want to include on a closing statement when conducting a 1031 exchange.

Party Identification

The first thing you want to do is make sure that you have the proper identity of the parties involved in the exchange. If you’re doing a 1031 exchange, often the identity of the seller is dressed up to reflect that the seller is the qualified intermediary on behalf of the taxpayer. The intermediary becomes the synthetic seller under the treasury regulations – a sort of surrogate that takes the sales proceeds. If you’re doing a 1031 exchange (either as a buyer or a seller) you may want to dress up the settlement statement to reflect that nuance.

Closing Date

Many things depend on the date of closing – the day that the benefits and burdens of ownership shift. For example, we use the date of closing to calculate your 45 day identification period as well as the 180 day exchange period. Sometimes people will prepare a settlement statement and then the transaction won’t close on the day that it’s planned to, but nobody changes the closing date on the settlement statement. Or perhaps there are multiple dates – a closing date and then a date for disbursing the funds. In this situation, what is the closing date? The date of closing or the date the funds were received? Determining the date of transfer itself is essential because all of your 1031 exchange deadlines will be calculated from that. If there’s a discrepancy it’s important to resolve it.

Another important detail is how much you sold your property for. In a 1031 exchange, if you’re using the 200% rule for identifying your property (which is a ceiling which caps how much you can identify) knowing the consideration that was paid for the relinquished property is critical because you double that amount to get to your ceiling. If there’s a change in purchase price, it should be reflected in the settlement statement.

Defer The Tax – Maximize Your Gain

With a 1031 exchange, you can defer your capital gains tax burden and maximize your gain by reinvesting your net proceeds into a bigger and better investment. If you want to learn more about the specific benefits and requirements of a 1031 exchange, contact an intermediary at CPEC1031, LLC today. Our qualified intermediaries have over two decades worth of experience working on all types of 1031 exchanges. We can help you navigate the waters of the 1031 exchange process. Contact us today at our Minneapolis offices to learn more!

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Real Estate Closing Agents

If you work as a closer for real estate transactions and you're notified that one of the parties to the transaction wants to do a 1031 exchange, it’s important for you to make note of that right away in the file and find out who are the people that are helping facilitate this exchange. Here are a few tips for closing agents who encounter 1031 exchanges.

Eleventh Hour Fire Drills

We often get calls from closers at the eleventh hour saying that nobody made arrangements for the 1031 exchange. Everybody involved thought it was someone else's job to do, and now we need to hurry up and get 1031 documents prepared for a closing that's imminent. We can do that, but it's a real fire drill.

Questions to Ask

The better arrangement is to contact the party that intends to do a 1031. Ask them the following questions:

• Is this your relinquished property that you're selling?

• Have you started your process with a qualified intermediary?

How a Qualified Intermediary can Help

If they haven't started with a qualified intermediary, have them contact CPEC 1031 right away. We can get a copy of the purchase agreement and title work from you; we can gather the specific details in particular that we need from the seller; and we can put together the 1031 and the closing instructions that you'll need to know how to prepare the settlement statement and what notices need to be given to the other parties. This allows all of the documentation to be dealt with up front well before the closing occurs so that we have a smooth signing ceremony.

• Start Your Exchange: If you have questions about closing documents related to a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What Closing Costs May be Paid as Part of a 1031 Exchange?

You may use your 1031 funds to pay certain customary “transactional items” that relate to the disposition of the relinquished property or to the acquisition of the replacement property and that appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g. commissions, prorated taxes, recording or transfer taxes, and title company fees).

Oddball Fees

Because there is potential for ambiguity as to what is a customary or qualifying transactional item, oddball fees and questionable transactional expenses that may not customarily be paid as part of a closing in the locality where the properties are located, should be paid out-of-pocket (not from the 1031 funds) to eschew any potential challenge.

From the IRS

Page 12 of IRS publication 544 states that:

Exchange expenses are generally the closing costs you pay. They include such items as brokerage commissions, attorney fees, and deed preparation fees. Subtract these expenses from the consideration received to figure the amount realized on the exchange. If you receive cash or unlike property in addition to the like kind property and realize a gain on the exchange, subtract the expenses from the cash or fair market value of the unlike property. Then, use the net amount to figure the recognized gain.

Your qualified intermediary probably cannot be 100% sure that ALL of your transactional expenses will qualify to be paid from the 1031 funds. However, I suspect that your CPA or accountant will have a much better feel for what is a permitted typical cost or what is a qualifying expense.  After all, your CPA or accountant is the person who will actually sign-off on your tax return and they probably know your specific tax-situation better than anyone else.

• Start Your 1031 Exchange: If you have questions about closing costs in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

How to Avoid Boot on the 1031 Closing Statement

Many closers and title professionals have questions about what expenses to put on the closing statement and what to keep off the closing statement so that the parties don't trigger boot. Here are a few tips for avoiding boot on the closing statement during a 1031 exchange.

3 Things to Remember

On the sale of the old relinquished property closers need to be careful about the security deposits that must be paid over from the seller to the buyer. Further, they need to be careful about the rents that have been collected by the seller, and which in-part need to be paid over to the buyer for those days that the buyer will own the property during the month for which the rents have been collected. Finally, closers need to be really careful about tax prorations, charges against the seller for real estate taxes that would normally be paid by the seller out of their operating account.

Dealing with these Expenses

So what's the most proven way to deal with these expenses on the sale of the relinquished property? It's to have the seller pay to the buyer or wire transfer money to the title company for those amounts and show them as paid-outside-of-closing (“POC”). That way all of the equity from the sale of the relinquished property can be moved into the new replacement property.

There are also some closing costs on the replacement property you need to be careful about, in particular any costs related to the new mortgage or deed of trust on the replacement property. Ideally the taxpayer (the buyer) doing the exchange will either get a no-cost loan from their lender, or will pay those loan origination fees and other loan related expenses out-of-pocket, rather than utilizing the exchange funds to pay for the lender costs.

• Start Your 1031 Exchange: If you have questions about avoiding boot on the closing statement, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved