What To Know About Closing Expenses On 1031 Exchanges
But what about expenses that don’t necessarily fit into your typical closing statement, a classic example of which being rent proration and security deposits on the sale of a relinquished property?
The correct way to go about transferring future rent and security deposits to the new owner of the property is to cut a check from your own expense account. If you debit these kinds of expenses to your closings statement, you are effectively freeing money in your account for your own use and taking what as known as boot from the proceeds of the transaction. 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 should be equally wary when you are closing on the your replacement property, especially in regard to fees related to the acquisition of new debt. Just as expenses such as security deposits and rent proration on the sale of your old property must come out of your own pocket, so must loan origination, underwriting and processing fees.
The fact of the matter is that the IRS examines these sorts of transactions, and will not look kindly on your receiving non-like-kind proceeds or cash benefits from 1031 transactions. With this in mind, you should be wary and take care regarding what expenses end up on your closing statement.
United States property investors can save their money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from Uncle Sam!
