What Expenses Can & Cannot Go on the 1031 Exchange Closing Statement?

When you’re doing a 1031 exchange, the primary goal is to move all of your equity into the new relinquished property. But the exception to that rule is that you can use some of your exchange proceeds to pay customary transactional expenses that would appear in the sold property’s locality.

Expenses that Can Go on the Closing Statement

So you can pay your broker commission and your attorney fees that are related to the transaction. You can pay recording fees and title company charges. You can even pay your qualified intermediary fees. If a termite inspection is a customary transactional expense in the locality, then you can pay that as well on the closing statement.

Expenses that Should Not Go on the Closing Statement

Certain expenses should not be put on the closing statement from the 1031 exchange. For example let’s say the seller wanted to put his credit card bill on the sale statement, thinking that “well I had to fix up the property to get it and I charged all of those repairs on my credit card so I think I’m going to pay my credit card bill on the closing statement.”

Well that is not contractually associated with the property and should not be paid on the settlement statement because it doesn’t fit into what the treasury regulations require for debt that must be associated with the property, not just mentally but contractually required to have been paid as part of the closing.

Rent, Taxes, Security Deposits

Other transactional expenses that can gum up the works are rent prorations, security deposits, and tax prorations. Each of those items would probably be better paid out of the seller’s pocket rather than dipping into the sales proceeds. Remember, the idea is we want to move all of our equity – all of our net proceeds – into the new replacement property and items that are really operational expenses like taxes and deposits should be paid by the seller out of their operating account.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Can You Reimburse Legal Fees Paid Before Closing in a 1031 Exchange?

The question of how to pay certain fees in a 1031 exchange is a common one and can get a little complicated. In this article, we are going to talk about how to handle legal fees and reimbursements in a 1031 exchange transaction.

Related Legal Fees

In general, you are allowed to pay legal fees directly related to your 1031 transaction out of your net proceeds. Any unrelated legal expenses may not be paid from your sales proceeds.

The treasury regulations state that you can pay ordinary, standard, customary transactional expenses out of the exchange funds. Any legal fees directly related to your exchange would qualify under this definition.

Starting a Like-Kind Exchange

Start your like-kind exchange today by contacting CPEC1031. Our qualified intermediaries have more than twenty years of experience working on 1031 exchanges of all shapes and sizes and in all business sectors. Reach out to our qualified intermediaries right now to learn more about our services and how we can help you save money with a 1031 exchange. Our primary office can be found in downtown Minneapolis, but we work with clients throughout the state of Minnesota and the United States.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

What if a Taxpayer Fails to Identify Replacement Property in a 1031 Exchange?

What happens if we do a 1031 exchange and the taxpayer does not identify replacement property within the 45 days?

1031 Identification Periods

If the taxpayer actually closes on their property within the first 45 days, they don’t have to identify. They are deemed to have identified because they closed on and receive their property during the 45 days. If, however, they want to keep hope alive after the 45th day, the only way to do that is to designate in writing replacement properties that may be received by the taxpayer within the remaining exchange period.

Failing to Identify

If you fail to identify or you revoke your identification in writing during the 45 day period, then the exchange ends at midnight of the 45th day and no other replacement properties may be received because there have been none identified. At this point you are now looking at having conducted a taxable sale (or partly taxable sale) and you’ll receive back your unused exchange funds. However, you may have to give away a lot of your hard-earned equity in state and federal taxes.

You should always use the time before the relinquished property closing and the 45 days thereafter to vigorously search for like-kind properties that you can designate for your 1031 exchange; or lock-down a replacement property with a reverse exchange to increase your success rate in deferring the 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Can You Extend Your 1031 Exchange Identification Period if it Lands on a Weekend?

Some of the most common questions we get from clients are regarding 1031 exchange identification periods. We’ve explained many times that you have 180 days total to complete your 1031 exchange, and the first 45 days of that is your identification period. But not all situations are that cut and dry. In this article, we’re going to take a look at a 1031 exchange example that will answer the question: can you extend the 45 day identification period if it ends on a weekend?

1031 Exchange Example

Consider the following 1031 exchange scenario: A taxpayer sells their relinquished property on December 28. The 45-day identification period therefore expires on Saturday, February 11. Given that February 11 falls on a weekend, does the taxpayer have until the next business day, Monday, February 13, to identity replacement property, or must they do so by midnight, Feb 11?

1031 Deadlines are Set in Stone

This is an excellent and common question. The simple answer is no. There is not a roll-over to the next business day when it comes to the 1031 exchange deadlines. The 45th day and 180th day are set in stone deadlines. There are no possible extensions.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Can a Sibling Act as a Qualified Intermediary?

It’s important to involve a qualified intermediary in your 1031 exchange. However, not just anyone can act as your intermediary. There are certain restrictions that apply. In this article, we are going to discuss whether or not your sibling can act as your qualified intermediary in a 1031 exchange.

Qualified Intermediaries

First off, let’s offer a quick reminder of what an intermediary does and why it’s important to involve one in your 1031 transaction. A qualified intermediary serves many functions in a 1031 exchange. They are your adviser throughout the exchange process. They can put together all the necessary 1031 documentation for you. They can ensure that you do everything in your power to successfully complete the 1031 exchange.

Disqualified Parties

Some parties are disqualified outright from acting as your 1031 intermediary. Anyone who is related to the taxpayer conducting the exchange by blood or business affiliation is excluded from acting as the qualified intermediary on the transaction. So your blood relatives (including your sister or brother) would not be allowed to act as your 1031 exchange intermediary. Your intermediary needs to be someone who is a neutral third party and unbeholden to you (the taxpayer).

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved