Many people now realize the gains they stand to reap in a 1031 property exchange. The primary benefit attracting investors is the ability to defer taxation of the capital gains in your transaction. To guarantee success, it’s essential to have a 1031 qualified intermediary to help you handle the transaction, notes 1031 Exchange Place
When picking an intermediary, the factor that influences most investors is the cost. This should, however, not be your determining factor since it depends on various elements. Being well versed in the constitution of closing costs will help you make the right choice. Here are some of the expenses that comprise 1031 exchange closing costs:
Using the proceeds of your property sale to pay for exchange expenses won’t attract tax liability. Exchange expenses generally include your transaction’s escrow, transfer, attorney and recording fees. The title insurance fees of your insurance policy are also part of the exchange expenses.
Payment of non-exchange costs using the funds from your relinquished property’s sale is partially taxable. Common non-exchange expenses in 1031 transaction include prorated rents, security deposits, appraisal costs, property taxes, and insurance premiums. You can avoid taxes on most of these non-exchange costs by paying for them in cash rather than using the funds from your 1031 transaction.
Transactional items are those that relate to the selling of your relinquished property and buying the replacement one. According to the IRS regulations, you can only use exchange funds to pay for these items if they appear in your closing statement as a buyer or seller’s responsibility. Should you not pay for transactional items at closing, then they’re tax-liable if paid later using exchange funds.
There are numerous advice articles on 1031 exchange transactions. These articles might make it appear that the transactions are easy enough to handle on your own. Most investors who choose this path, unfortunately, suffer significant tax penalties due to mistakes in the above closing costs.