“What Costs Can Be Considered Acceptable Exchange Expenses?”
Effective 1031 Planning
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This is for informational purposes only. There are risks associated with investing in real estate properties including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/ guidance regarding your particular situation. Securities offered through Arkadios Capital. Member FINRA/SIPC
WHAT COSTS CAN BE DEDUCTED
A frequently asked question is “What expenses can be deducted from the exchange proceeds without resulting in a tax consequence?” Although the IRS has not published a complete list of qualifying expenses, there are some rulings that provide general parameters. Brokerage commissions can be deducted from the exchange proceeds (Revenue Ruling 72456). Other transactional costs may also be able to be deducted if they are paid in connection with the exchange. (Letter Ruling 8328011).
WHAT ARE “EXCHANGE EXPENSES?”
Transactional costs that are referred to as “exchange expenses” on Form 8824 are not specifically listed but may generally include costs that are:
A. A direct cost of selling real property, which typically include:
• Real estate commissions
• Title insurance premiums
• Closing or escrow fees
• Legal fees
• Transfer taxes
• Notary fees
• Recording fees
B. Costs specifically related to the fact the transaction is an exchange such as the Qualified Intermediary fees.
ITEMS THAT ARE NOW “EXCHANGE EXPENSES”
Although not a complete list, the costs related to obtaining the loan should not be deducted from the proceeds.
THESE “NONEXCHANGE EXPENSES” INCLUDE:
• Mortgage points and assumption fees
• Credit reports
• Lender’s title insurance
• Prorated mortgage insurance
• Loan fees and loan application fees
OTHER “NONEXCHANGE EXPENSES” CAN INCLUDE:
• Property taxes
• Utility charges
• Association fees
• Hazard insurance
• Credits for lease deposits
• Prepaid rents and security deposits
These rough guidelines do not address every potential cost. Exchangers should review their specific transaction and closing costs with their tax and/or legal advisors.