Planning for a 1031 Exchange

Planning for a 1031 Exchange


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Planning for a 1031 Exchange

According to by Dave Foster | BiggerPockets.com, “When planning for a 1031 exchange, it’s important to have a target reinvestment amount. Why? Because to defer all tax in a 1031 Exchange, you must purchase at least as much replacement investment real estate as your net sale.”

Planning for a 1031 Exchange

“But what is the net sale? Well, the easy answer is the contract price minus closing costs and commissions. So which closing costs count in this equation?

Frankly, as in many aspects of the 1031 exchange, there isn’t a crystal clear answer to that question.”

1031 Exchange Eligible Expenses

Fortunately, the IRS provides examples of qualified 1031 exchange expenses. Referred to as exchange costs, the IRS allows payment with exchange funds. That’s because these costs are considered typical closing costs related to the sale of property. As a result, using exchange funds to cover these costs won’t result in tax penalties or the disqualification of your exchange.

Exchange costs include:

  • Escrow fees
  • Broker’s commissions
  • Mandatory appraisal costs (purchase contract only)
  • Attorney costs related to the sale
  • Recording fees
  • Title insurance costs
  • Transfer taxes
  • Prorated taxes
  • Qualified intermediary fees

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PHOTO: Craft Commercial Blog – Greater Raleigh Commercial Real Estate

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