Closing Costs & 1031 Exchange

Written By Logan Snodgrass

It is very important to understand how closing costs for both a property sold, or a property purchased as part of a 1031 Exchange can be treated as allowable (not taxed) or not allowed (subject to tax). Also keep in mind that your Qualified Intermediary will ONLY send money to a closing agent for the purposes of closing a purchase or sale, they should NEVER send money to third-party vendors (such as contractors and appraisers) that would preclude the payment from being accounted for on the settlement statement.

Typically, items allowable to be paid for with exchange proceeds include one-time customary charges required to close a transaction. Paying these items at close will REDUCE the required purchase value dollar for dollar. A summary list is below, this is NOT a complete list:

  • Earnest Money Deposits (to acquire suitable replacement property)

  • Escrow / Title / Attorney / Closing Agent Fees

  • Accommodator Fees

  • Legal Fees

  • CPA / Advisor Fees

  • Realtor/Broker Commissions

  • Buyer concessions (where the exchanger is the SELLER)

  • Liens recorded against the property

  • Excise or Transfer Taxes (where the exchanger is the SELLER)

  • Appraisal and Inspec on Fees (when exchanger is the BUYER and required by buyer (not by lender))

Items typically NOT allowed to be paid for with exchange proceeds include all items where costs are either not associated with closing the transacton or result in purchasing anything other than Real Property as part of the exchange. These items include, but are not limited to:

  • Appraisals/InspecTons ordered by a lender as part of acquiring a loan

  • Points, fees, and closing costs as part of acquiring a loan

  • Alta Title insurance for the benefit of a lender

  • Property Taxes

  • Insurance Premiums

  • Prepaid HOA, Insurance, Tax, Utilities, or other similar costs

  • Personal Debt, regardless of its use, including credit cards and Equity Lines against other property

  • Security Deposits or Prepaid Rents

  • Return of cash to the exchanger as a refund of costs associated with preparing the property for sale

  • Money or benefit provided to buyer from seller when buyer is the exchanger (seen as a return of proceeds)

*The exchanger may bring new cash to close to cover the costs associated with items not allowable as part of the exchange to insure they are not subject to tax (if purchasing equal or greater value than property sold).

Logan Snodgrass
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Refinancing Before and After an Exchange