Our thanks to Asset Preservation, Inc. for the information contained in this article. (API) is a qualified intermediary as defined in the regulations under Internal Revenue Code §1031.
A question taxpayers frequently ask is “What expenses can be deducted from the 1031 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 for guidance. Brokerage
commissions can be deducted from the 1031 exchange proceeds (Revenue Ruling 72-456). Other
transactional costs may also be able to be deducted if they are paid in connection with the exchange.
(Letter Ruling 8328011).
Transactional costs that are referred to as “exchange expenses” on IRS Form 8824 are not specifically listed but should generally include costs that are:
1. A direct cost of selling real property which typically includes: • Real estate commissions • Title insurance premiums • Closing or escrow fees • Legal fees • Transfer taxes • Notary fees • Recording fees
2. Costs specifically related to the fact the transaction is a 1031 exchange such as the Qualified Intermediary (QI) fees.
Although not an exhaustive list, the costs related to obtaining the loan should generally not be deducted from the 1031 exchange proceeds.
“NON-EXCHANGE EXPENSES” INCLUDE:
• Mortgage points and assumption fees
• Credit reports
• Lender’s title insurance
• Prorated mortgage insurance
• Loan fees and loan application fees
OTHER “NON-EXCHANGE 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 or expense. Taxpayers should always review their specific transaction and closing costs with their tax and/or legal advisors.
Asset Preservation, Inc. (API) is a qualified intermediary as defined in the regulations under Internal Revenue Code $1031. Neither API, it’s officers or employees are authorized or permitted under applicable laws to provide tax or legal advice to any client or prospective client of API. The tax related information contained herein or in any other communication that you may have with a representative of API should not be construed as tax or legal advice specific to your situation and should not be relied upon in making any business, legal or tax related decision. A proper evaluation of the benefits and risks associated with a particular transaction or tax return position often requires advice from a competent tax and/or legal advisor familiar with your specific transaction, objectives and the relevant facts. We strongly urge you to involve your tax and/or legal advisor (or to seek such advice) in any significant real estate or business related transaction. © 2019 Asset Preservation, Inc. All rights reserved.
Real estate brokerage services are provided through Turner Investment Corporation. Securities are offered through McDermott Investment Services, LLC a Registered Broker/Dealer, Member FINRA, SIPC and MSRB. McDermott Investment Services, LLC and Turner Investment Corporation are separate entities.
Turner Investment Corporation and McDermott Investment Services are neither CPAs nor Attorneys and therefore cannot provide tax or legal advice. Nothing contained herein should be construed as tax or legal advice which should be provided by your own tax or legal advisor.
Properties and Investments shown may be pending approval during the Firm’s Due Diligence Process or may otherwise be unavailable. The information provided is neither an offer to sell nor a solicitation to buy an interest in any property or investment, which may only be done after delivery of a Private Placement Memorandum and client suitability is reviewed & approved.
Projected income or returns are only projections and are entirely dependent on the performance of the underlying property(s) and sponsor. Investment real estate, including securitized real estate, comes with substantial risks, including but not limited to; the absence of guaranteed income; lack of liquidity; the risks of owning, managing, operating and leasing properties; possible conflicts of interest with managers and affiliated persons or entities; the risks associated with leverage; tax risks, including possible changes in tax law; declining markets and challenging economic conditions; on- going fees; and known or unknown regulatory challenges.
Finally, it must be understood that the ultimate risk of investing in real estate could include the total loss of your principal investment.
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