Recently, we had a client that owned land that had a bunch of debris and junk on it. The buyer didn’t want to take the property with all of this debris so they required the seller to escrow a bunch of money to assure the buyer that the junk was going to be removed. If you’re going to do this, escrow money out of your own pocket and not out of the 1031 exchange proceeds because you want to have all of your exchange funds immediately available for deployment so they’re ready for closing. Whenever possible, if you have holdbacks or escrows on the sale of the relinquished property, fund those out ..read more

When dealing with incidental items of personal property in a 1031 exchange, it’s a good idea to dress up the settlement statement to remove ambiguity and create certainty. If you are receiving appliances, tools, or other equipment as part of the purchase of your 1031 exchange real property, it’s a good idea to include a line item on the settlement statement that shows that those items were paid for pursuant to the purchase agreement and bill of sale. Furthermore, it’s an even better idea to pay for all of these items outside of closing, using your own out-of-pocket funds (and not the 1031 exc ..read more

One of the benefits of section 1031 of the Internal Revenue Code is that it can be used for a variety of different purposes. In this article, we are going to discuss a few of the common reasons why taxpayers decide to conduct 1031 exchanges with their like-kind real estate. Lateral 1031 Exchanges Some people do lateral 1031 exchanges simply to move from one geographical area to another. If you are nearing retirement and you’d like to sell your property in one state and move to another state in which you plan to retire, this is a great option to do that. In a lateral 1031 exchange, you’re not ..read more

In a 1031 exchange, the G(6) limitation says that a taxpayer can’t pledge, borrow, or receive the 1031 exchange funds that are held by the qualified intermediary. When the sale of the relinquished property occurs, the money goes into a “qualified intermediary containment chamber.” The qualified intermediary holds that money until the exchange is over so that the taxpayer can’t receive it. Transactional Expenses You also have to deal with transactional expenses involved in the 1031 purchase. For that we need to look at the G(7) treasury regulations. G(7) is kind of an exception to the G(6) lim ..read more

In a 1031 exchange, it’s important to balance your value, equity, and debt. Some taxpayers assume that all they need to do is reinvest the equity from their relinquished property into their replacement property. These taxpayers are not thinking about their need to continue their investment into properties of equivalent or greater value, equity, and debt. It’s important to remember that the first dollars off the table are the profit dollars and the last dollars off the table are the return of your original basis. If you are going to take some boot (non-1031 proceeds), it can be reflected on th ..read more

There are various items on a typical 1031 exchange closing statement. Many people have questions about whether various operational expenses can be paid using 1031 exchange funds. In this article, we are going to discuss why you need to be extra careful when paying operational expenses in a 1031 exchange. Operational Expenses You have to be careful when paying operational expenses (like prorated property taxes) using your 1031 exchange funds. You’re going to pay your property taxes whether you sold the property or not. That tax bill is coming no matter what and it creeps into the settlement st ..read more

If you’re selling a business that also has land and buildings, you are going to want to allocate in the purchase agreement the highest value to the land and buildings and the lowest value to the other stuff (personal property that can’t be included in a 1031 exchange). You may have very low basis in that other stuff because there’s been some rapid depreciation that’s been available. In some situations, it can make a big difference. Let’s say you’re selling a trucking company. After paying the bank back, and then paying the taxes on your recaptured depreciation, you may not have much to show f ..read more

Here is a list of the items that are probably OK to pay using 1031 exchange funds as long as they relate to the specific exchange transaction: Broker Commissions Finder and Referral Fees Title Insurance Premiums (for owner’s title insurance specifically) Closing Agent Fees Tax Advisor and Financial Planner Fees Recording and Filing Fees State Deed Tax and Transfer Charges Attorney Fees Related to the Specific 1031 Exchange Transaction It’s important to remember that these expenses are only OK to pay using 1031 funds insofar as they are related to the 1031 exchange itself. Fo ..read more

In a 1031 exchange, you may find that you have some boot items on the settlement statement that you clearly don’t want to pay for out of the 1031 proceeds. In this situation, the first thing you want to look at is whether you have some of your own money in the transaction that you can apply toward these items. For example, if there was an earnest money deposit that you paid for the replacement property, you could earmark a portion or all of that deposit to pay for the boot items. Additionally, you may be getting some credits from the other side. Maybe the seller has agreed to give you a conce ..read more

A 1031 exchange is not a zero sum game. Not everybody wants to do a 100% tax-deferred 1031 exchange. If you want to take some taxable proceeds (boot) during your 1031 exchange, the best time to do that is before the rest of your net proceeds are sent to the intermediary. In this scenario, you would amend the exchange documents and the closing instructions. Then on the settlement statement, you have the settlement agent (the title company or escrow officer) send the boot to the taxpayer before the rest of the net proceeds are sent to the qualified intermediary. Once the intermediary gets the p ..read more