The Biggest and Most Common Error in 1031 Exchange

Understanding the difference between permissible and non-permissible selling expenses is difficult. The line between the two is not well defined in law or most cases. However, the consequences certainly are. In the worst case, a failed exchange. In the less extreme, “boot” for the investor to pay tax on.

However, there are enough guidelines to avoid the grey areas of an exchange.

The following are permissible and non-permissible expenses:

Permissible

  • Escrow agent, settlement agent or closing attorney fees

  • Real estate broker's commissions

  • Tax advisor fees related to the disposition or acquisition

  • Attorney fees and costs related to the disposition or acquisition

  • 1031 Exchange Qualified Intermediary fees

  • Finder fees or referral fees

  • Recording or filing fees

  • Documentary transfer taxes

  • Owner's title insurance premiums

Non-permissible

  • Financing or lender costs such as loan fees, loan points, appraisal fees, mortgage insurance premiums, lender's title insurance policy premiums, and other loan processing fees and costs

  • Insurance premium payments

  • Repairs and/or maintenance costs

  • Prorated Property taxes

  • Prorated rents

  • Security deposits

  • Payoff of credit card balances

This simple list does no justice to the potential complexities of this transaction. There is no substitute to engaging tax, legal and financial 1031 experts prior to starting your exchange. Most non-permissible items can be avoided with a properly structured deal.

Best

Josh