If you think about it, the seller of a relinquished property in a 1031 exchange really should be holding their security deposits in a separate escrow account. Upon closing, those security deposits should be transferred to the buyer. But a lot of time property owners don’t keep separate accounts and instead want to raid the proceeds from the sale of the relinquished property to pay the security deposits over to the buyer.
Remember we’re supposed to move all equity from the relinquished property to the replacement property, and raiding the kitty to pay the security deposits to the buyer could be a taxable event. The same goes for rent proration. If the seller has collected rents for the month, they should be taking the money out of their operating account for the portion of the month that the buyer will own the property.
Oftentimes it’s a good idea to work as much of these details out with the seller and the Qualified Intermediary (“QI”) and then have the seller’s CPA or accountant double-check the debits and reductions for transactional expense before closing. The seller’s CPA or accountant will know their tax situation better than anyone and can weigh in on what should and should not appear on the closing statement. That way if there is ever a question about it at tax time, their CPA or accountant will be aware of the details from closing.
Many people have questions about what closing costs are appropriate and having a good QI as a resource is really important.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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