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.”
“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.”
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:
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