1031 Exchange Fees? Yes, there are costs associated with 1031 exchanges. When you are selling an investment property and decide to do an IRC 1031 tax deferred exchange there are some closing costs that are considered allowable and unallowable expenses. Under §1031 in any sale where the exchanger pays closing costs that are necessary for the disposition of the property these costs can reduce the amount of purchase price a seller can spend on their replacement property.
Some of the costs include, commissions paid on the sale. Under Revenue Ruling 72-456 it clearly provides that brokerage commissions reduce the realized and recognized gain. No specific authority exists about the deduction of other costs however PLR (private letter ruling) 8328011, states the below costs are referred to as “exchange expenses” on IRS Tax Form 8824. With that being said, most tax practitioners consider these as allowable exchange expenses:
1031 Exchange Fees or Accommodator fees
- Messenger fees
- Escrow, Processing and Statement fees
- Finder fees
- Tax service fees
- Inspection and testing fees
- Notary and Recording fees
- Brokerage commissions
- Title insurance premiums
- Documentary Transfer taxes
- Legal/Consulting fees incurred in the transaction
It is also important to note there are some expenses that are considered Boot (taxable to the seller) These include any security deposits or rents given to the buyer as well as:
- Utilities
- Property taxes
- Property insurance
- Association dues
- Repairs and Termite work
- Credits to Buyers for non-recurring closing costs or repairs
- Loan Acquisition fees (such as points, mortgage insurance, application fees, lender’s title insurance, assumption fees, appraisal fees, hazardous waste/property inspections required by the lender)
The authority addressing the treatment of exchange expenses is limited, so always speak to your tax professional and reach out to us as the Qualified Intermediary to learn more!
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