What transactional expenses can you pay when you’re doing a 1031 exchange? Normally, in a 1031 exchange all of your equity from the sale of the relinquished property go to the intermediary and get reinvested to acquire the like-kind real estate. But you’re going to incur some costs along the way. You’re going to have to pay a real estate agent’s commission on the sale of the relinquished property. You may have to pay state deed tax, transfer fees, recording fees, title company charges, etc. The IRS says in the treasury regulations that you can use a portion of the equity to pay customary transactional expenses. But remember that sometimes non-transactional expenses creep into the closing statement. The property taxes, HOA dues, liability insurance – these are costs of ownership that you’re going to incur whether you sell the property or not. When you put these on the settlement statement that could trigger some recognition of gain. You may be better off bringing some cash to the closing and paying those operational expenses out of pocket. On the purchase of you replacement property, you may be astonished to find out that the costs associated with your new loan, such as origination fees, points, MRT, and other expenses related to the loan are not considered qualified transactional expenses that you can pay without triggering some gain. So you may want to bring some cash to the closing to cover those expenses or even better, negotiate with the lender to give you a no-cost loan where they don’t charge you a bunch of fees, but instead charge you a higher interest rate. Have your accountant go through these statements line-by-line because if you wait until April 15th to show it to your accountant, it will be too late.
Defer the tax. Maximize your gain.
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