Closing Of A Sale On Real Estate And 1031 Exchange Transactions

By Larry J. Conery

There are many expenses involved in the closing of a sale on real estate. There are the standard operating expenses, such as your agent's commission and the recording of the deed, which siphon money out of your proceeds and appear on the closing statement, but there are also the various oddball expenses that arise during the proceedings, some common examples of which are rent proration and security deposits.

These types of expenses do not form part of the closing statement. Transactions on 1031 exchange allow some expenses to be debited on your closing statement. However, some costs are inappropriate to be included so.

In changing ownership, you also transfer future rent and security deposits to the property's new owner. Getting the amount from your own account to cover said expenses can be the most suitable way to deal with this. You can not debit said expenses from your closing statement because in the process, you are freeing money from your account and using 'boot' from the transaction's proceeds.

Any cash benefit or boot you receive from the sale is not considered part of a like-kind exchange, and investors who have attempted this have found themselves facing IRS litigation.

You are responsible for all the expenses related to your replacement property particularly those that are not under like-kind exchange. In the course of a 1031 exchange - you also have to take into account fees for loan origination, underwriting, and processing. Payment of these fees has to come from your own property.

This article would like to emphasize the importance of being extra cautious in your 1031 exchange transactions. In case you are tempted to receive non like-kind proceeds or cash benefits from 1031 exchange, put in mind that the IRS may run after you and are actually looking closely on these types of transactions. - 23223

About the Author:

U.S. investors can save a lot of money by utilizing 1031 tax exchanges to defer all of their capital gains tax on the sale of investment property. A 1031 exchange is like an interest free loan from Uncle Sam.