TM 1031 Exchange
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Closing Costs and 1031 Exchanges

When involved in a 1031 exchange, generally, expenses that are considered non-recurring, such as real estate commissions, will reduce the value requirement of the replacement property and not create a tax liability.

Expenses that can create a tax liability, and not permitted to reduce the value of the replacement property if paid with exchange funds, generally, are expenses that are recurring such as property taxes or insurance.

Examples of non recurring expenses related to the purchase, sale and exchange are considered allowable and can include the following:

  • Real estate commissions
  • Referral Fees
  • Title insurance premiums
  • Closing or escrow fees
  • Recording Fees
  • Legal or Attorney Fees
  • Tax Advisor or Accounting Fees
  • Transfer taxes
  • Notary fees
Expenses that are considered not part of an exchange and are generally disallowed can include:
  • Loan Fees
  • Loan Points mortgage insurance costs
  • Property taxes
  • Prorated Rent
  • Insurance Premiums
  • Security Deposits
  • Payoff of credit card debt
  • Lender's title insurance
  • Credit Reports
Non exchange expenses paid with exchange funds are taxable but can be offset by other items such as prepaid taxes. One option is to pay recurring expenses with non 1031 funds to avoid creating taxable boot in the 1031 exchange.

Items such as prorated tax payments or security deposits owed to the buyer can be treated as non-recourse debt if handled properly and can be offset against debt assumed on the new replacement property.

Investors should carefully review all aspects of their 1031 exchange with their tax and or legal advisor fully understand and plan for possible tax consequences.

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