{"id":27273,"date":"2021-02-03T19:37:23","date_gmt":"2021-02-04T00:37:23","guid":{"rendered":"https:\/\/www.affiliated1031.com\/what-expenses-are-deductible-in-a-1031-exchange\/"},"modified":"2024-05-17T10:10:51","modified_gmt":"2024-05-17T14:10:51","slug":"what-expenses-are-deductible-in-a-1031-exchange","status":"publish","type":"post","link":"https:\/\/www.affiliated1031.com\/es\/what-expenses-are-deductible-in-a-1031-exchange\/","title":{"rendered":"What Expenses Are Deductible in a\u00a01031 Exchange?"},"content":{"rendered":"<div  class=\"tatsu-hffj5s5mfd8b2xcr tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 15px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-hffj5s5mgu44qubj\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-hffj5s5mi66021oq\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-hffj5s5mjef42y5e  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-hffj5s5mjef42y5e.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style><p>\n<\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-hffj5s5mi66021oq.tatsu-column{width: 100%;}.tatsu-hffj5s5mi66021oq.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-hffj5s5mi66021oq > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-hffj5s5mi66021oq > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-hffj5s5mi66021oq > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-hffj5s5mi66021oq > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-hffj5s5mfd8b2xcr .tatsu-section-pad{padding: 15px 0px 15px 0px;}.tatsu-hffj5s5mfd8b2xcr > .tatsu-bottom-divider{z-index: 9999;}.tatsu-hffj5s5mfd8b2xcr > .tatsu-top-divider{z-index: 9999;}.tatsu-hffj5s5mfd8b2xcr .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div><div  class=\"tatsu-h6usulihaibpa1s4 tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 15px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-h6usulihcrde2xqu\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-h6usulihfu8foi21\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-h6usulihi1e59znq  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-h6usulihi1e59znq.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style><p><\/p>\n<p>Here&#8217; a question I get asked at least once a week:<\/p>\n<p><em>\u00abHow can I reduce the price of what I am going to purchase as my Replacement Property?<\/em>\u00ab<\/p>\n<p>Well, there are a number of \u201cexchange expenses\u201d that will reduce the realized gain and recognized gain on a <a title=\"Link to Wikipedia 1031 Exchange Definition\" href=\"https:\/\/en.wikipedia.org\/wiki\/Internal_Revenue_Code_section_1031\">Section 1031 Exchange.<\/a> The real estate commission paid by the taxpayer to a real estate broker is an example of one such deductible expense.<\/p>\n<h2><span style=\"color: #333333; font-size: 22px;\">Deductible Here Is Your Comprehensive Guide To Deductible 1031 Expenses.<\/span><\/h2>\n<p>Understanding Deductible Expenses: Revenue Ruling 72-456 serves as a cornerstone in the realm of 1031 Exchanges, clarifying that certain expenses, when paid using exchange funds, do not render the transaction partially taxable. These expenses include:<\/p>\n<ul>\n<li>The<strong> Broker\u2019s Commissions:<\/strong> Perhaps one of the most significant expenses in a real estate transaction, broker\u2019s commissions are fully deductible when paid using 1031 exchange proceeds.<\/li>\n<li>\n<p><strong>Exchange Fees:<\/strong> Fees associated with facilitating the exchange process, such as intermediary fees, fall under the umbrella of deductible closing expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Title Insurance Fees<\/strong> (Owner\u2019s Policy): Protecting ownership rights is paramount in real estate transactions. Consequently, fees for the owner\u2019s policy of title insurance are considered exchange expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Escrow Fees:<\/strong> The costs incurred for escrow services, ensuring a smooth and secure transaction, are deductible when paid using exchange funds.<\/p>\n<\/li>\n<li>\n<p><strong>Appraisal Fees: <\/strong>When appraisal fees are required by the purchase contract, they qualify as deductible expenses, contributing to the overall cost of the exchange.<\/p>\n<\/li>\n<li>\n<p><strong>Transfer Taxes:<\/strong> Taxes levied on the transfer of property ownership, such as stamp duties, are eligible for payment using 1031 exchange proceeds.<\/p>\n<\/li>\n<li>\n<p><strong>Recording Fees:<\/strong> The fees associated with recording legal documents related to the transfer of property are considered deductible closing expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Attorney\u2019s Fees:<\/strong> Legal fees incurred in connection with the sale or purchase of the property are deductible, provided they are directly related to the exchange process.<\/p>\n<\/li>\n<\/ul>\n<h3>Navigating Non-Exchange Expenses:<\/h3>\n<p>While the aforementioned expenses are clearly deductible, certain costs commonly found on closing statements do not qualify as exchange expenses.<\/p>\n<p>However, some of these expenses may still provide tax benefits through deductions:<\/p>\n<ul>\n<li>\n<p><strong>Property Taxes: <\/strong>While property taxes are not considered exchange expenses, investors can still benefit from deductions when paying them, thereby offsetting the tax liability.<\/p>\n<\/li>\n<li>\n<p><strong>Loan Costs and Fees:<\/strong> Expenses associated with obtaining financing, such as loan origination fees and points, are typically not deductible as exchange expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Title Insurance Fees<\/strong> (Lender\u2019s Policy): Unlike fees for the owner\u2019s policy, fees for lender\u2019s title insurance policy are generally not considered exchange expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Appraisal and Environmental Investigation Costs (Lender Requirements)<\/strong>: Costs incurred for appraisals and environmental investigations mandated by the lender fall outside the scope of deductible closing expenses.<\/p>\n<\/li>\n<li>\n<p><strong>Security Deposits and Prorated Rents:<\/strong> These expenses, while common in real estate transactions, are typically not considered exchange expenses eligible for payment using 1031 exchange proceeds.<\/p>\n<\/li>\n<li>\n<p><strong>Insurance Premiums:<\/strong> Costs associated with property insurance premiums do not qualify as exchange expenses and are thus not deductible in the context of a 1031 exchange.<\/p>\n<\/li>\n<\/ul>\n<p>Let me provide an example:<\/p>\n<h3 class=\"null\">Example of Deductible and Non-Deductible Exchange Expenses<\/h3>\n<p>A Taxpayer originally purchased an apartment building for $975,000.00 in 2012.\u00a0 The taxpayer sells the building in 2021 for $2,300,000.00 and has an initial gross profit of $1,325,000.00.<\/p>\n<p>He was instructed to do a Section 1031 tax-deferred exchange and that he would have to purchase a Replacement Property of equal value or more than the Relinquished Property, which as we have already said he sold for $2,300,000.00.<\/p>\n<p>If he did not do a section 1031 exchange, he would have to pay long-term capital gains taxes of 20%, plus 25% federal deprecation recapture tax and any state taxes.\u00a0 Just on the long-term capital gains taxes, the taxpayer would have to pay 20% on $1,325,000.00 = $265,000.00.\u00a0 Of course, there are the additional taxes due to the state and federal depreciation recapture taxes to deal with.<\/p>\n<p>On the Relinquished transaction, the taxpayer hired a real estate broker whose commission was $115,000.00.\u00a0 The state charged $16,100.00 for transfer fees.\u00a0 There were $595.00 in title search fees and his CPA charged him $2,500.00 for analyzing and advising on the transaction.\u00a0 He also was responsible for an updated survey which cost $600.00 and there were $120.00 \u00a0in recording fees.<\/p>\n<p>The taxpayer\u2019s share of the real estate taxes for the year were $26,500.00.<\/p>\n<p>He has paid his Attorney\/Escrow Agent the sum of $3,000.00 to represent him on this transaction.<\/p>\n<p>There was an existing loan on the property that had to be paid off in the amount of $455,000.00.\u00a0 Additionally, there was interest owed on the loan of $9,700.00.<\/p>\n<p>So, that leaves the big question:\u00a0 How much Replacement property does the taxpayer have to purchase, in order to defer paying any taxes, to the \u00a0Federal and\/or\u00a0 State Governments?<\/p>\n<p><strong>Allowable Exchange Expenses<\/strong><\/p>\n<p>\u00a0<\/p>\n<p>Real Estate Commission\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $115,000.00<\/p>\n<p>State Transfer Fees\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $\u00a0 16,100.00<\/p>\n<p>Tile Search Fee\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 \u00a0 595.00<\/p>\n<p>CPA Charge\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$\u00a0 \u00a0 \u00a02,500.00<\/p>\n<p>Attorney\/Escrow Co. Fee\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$\u00a0\u00a0\u00a0\u00a0 3,000.00<\/p>\n<p>Survey\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 \u00a0 600.00<\/p>\n<p><u>Recording Fees\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $\u00a0 \u00a0 \u00a0 \u00a0 120.00<\/u><\/p>\n<p>Total Allowable Exchange Expenses\u00a0 $137,915.00<\/p>\n<p><strong>REPLACEMENT PROPERTY $ AMOUNT IF TAXPAYER WANTS TO DEFER ALL TAXES IS:\u00a0 $2,162,085.00.<\/strong><\/p>\n<p>How did we arrive at that figure?\u00a0 Sales Price of $2,300,000.00 less $137,915.00 in allowable exchange expenses = $2,162,085.00.<\/p>\n<p><strong>Non-Allowed Exchange Expenses:<\/strong><\/p>\n<p>Real Estate Taxes\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $\u00a0 \u00a026,500.00<\/p>\n<p>Loan Payoff\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $ 455,000.00<\/p>\n<p><u>Interest Owed\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$\u00a0 \u00a0 \u00a09,700.00<\/u><\/p>\n<p>Total of Non-Allowed Exchange Expenses:\u00a0 $491,200.00*<\/p>\n<p>*\u00a0 Of the Non-Allowed Exchange Expenses, both the Real Estate Taxes of $ 26,500.00 and the Interest Owed, in the amount of\u00a0 $9,700.00 are allowed as deductions to profit, just not figured into the amount of what the new Replacement Property figure would be.<\/p>\n<p>As you can see from the example, it is <strong>ALWAYS<\/strong> a good idea to hire a competent attorney, a CPA, and a Qualified Intermediary, to assist the Taxpayer on a Section 1031 exchange.\u00a0<\/p>\n<p><strong>Affiliated 1031,<\/strong>\u00a0<strong>LLC<\/strong> always recommends that the taxpayer should consult their tax and\/or legal counsel on all matters dealing with the Internal Revenue Service.<\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p><\/p>\n<p>\u00a0<\/p><\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-h6usulihfu8foi21.tatsu-column{width: 100%;}.tatsu-h6usulihfu8foi21.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-h6usulihfu8foi21 > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-h6usulihfu8foi21 > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6usulihfu8foi21 > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-h6usulihfu8foi21 > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-h6usulihaibpa1s4 .tatsu-section-pad{padding: 15px 0px 15px 0px;}.tatsu-h6usulihaibpa1s4 > .tatsu-bottom-divider{z-index: 9999;}.tatsu-h6usulihaibpa1s4 > .tatsu-top-divider{z-index: 9999;}.tatsu-h6usulihaibpa1s4 .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div><div  class=\"tatsu-hffj5s5mx5alna8x tatsu-section  tatsu-bg-overlay   tatsu-clearfix\" data-title=\"\"  data-headerscheme=\"background--dark\"><div class='tatsu-section-pad clearfix' data-padding='{\"d\":\"15px 0px 15px 0px\"}' data-padding-top='15px'><div class=\"tatsu-row-wrap  tatsu-wrap tatsu-row-one-col tatsu-row-has-one-cols tatsu-medium-gutter tatsu-reg-cols  tatsu-clearfix tatsu-hffj5s5myld4f7ew\" ><div  class=\"tatsu-row \" ><div  class=\"tatsu-column  tatsu-bg-overlay tatsu-one-col tatsu-column-image-none tatsu-column-effect-none  tatsu-hffj5s5mzu8h5jho\"  data-parallax-speed=\"0\" style=\"\"><div class=\"tatsu-column-inner \" ><div class=\"tatsu-column-pad-wrap\"><div class=\"tatsu-column-pad\" ><div  class=\"tatsu-module tatsu-text-block-wrap tatsu-hffj5s5n106hnape  \"><div class=\"tatsu-text-inner tatsu-align-center  clearfix\" ><style>.tatsu-hffj5s5n106hnape.tatsu-text-block-wrap .tatsu-text-inner{width: 100%;text-align: left;}<\/style>\n<\/div><\/div><\/div><\/div><div class = \"tatsu-column-bg-image-wrap\"><div class = \"tatsu-column-bg-image tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-column-overlay tatsu-animate-none\" ><\/div><\/div><style>.tatsu-row > .tatsu-hffj5s5mzu8h5jho.tatsu-column{width: 100%;}.tatsu-hffj5s5mzu8h5jho.tatsu-column > .tatsu-column-inner > .tatsu-column-overlay{mix-blend-mode: normal;}.tatsu-hffj5s5mzu8h5jho > .tatsu-column-inner > .tatsu-top-divider{z-index: 9999;}.tatsu-hffj5s5mzu8h5jho > .tatsu-column-inner > .tatsu-bottom-divider{z-index: 9999;}.tatsu-hffj5s5mzu8h5jho > .tatsu-column-inner > .tatsu-left-divider{z-index: 9999;}.tatsu-hffj5s5mzu8h5jho > .tatsu-column-inner > .tatsu-right-divider{z-index: 9999;}<\/style><\/div><\/div><\/div><\/div><div class=\"tatsu-section-background-wrap\"><div class = \"tatsu-section-background tatsu-bg-lazyload\" data-src = \"\"><\/div><\/div><div class=\"tatsu-overlay tatsu-section-overlay\"><\/div><style>.tatsu-hffj5s5mx5alna8x .tatsu-section-pad{padding: 15px 0px 15px 0px;}.tatsu-hffj5s5mx5alna8x > .tatsu-bottom-divider{z-index: 9999;}.tatsu-hffj5s5mx5alna8x > .tatsu-top-divider{z-index: 9999;}.tatsu-hffj5s5mx5alna8x .tatsu-section-overlay{mix-blend-mode: normal;}<\/style><\/div>","protected":false},"excerpt":{"rendered":"<p> There are a number of \u201cexchange expenses\u201d that will reduce the realized gain and recognized gain on a Section 1031 Exchange.<\/p>\n<div><a href=\"https:\/\/www.affiliated1031.com\/es\/what-expenses-are-deductible-in-a-1031-exchange\/\" class=\"exp-read-more exp-read-more-underlined\">Read More<\/a><\/div>\n","protected":false},"author":11,"featured_media":27405,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","footnotes":""},"categories":[57],"tags":[58,59],"class_list":["post-27273","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-1031-exchange-basics-es","tag-1031-exchange-es","tag-liberty-1031-es"],"_links":{"self":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27273","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/comments?post=27273"}],"version-history":[{"count":3,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27273\/revisions"}],"predecessor-version":[{"id":28280,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/posts\/27273\/revisions\/28280"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media\/27405"}],"wp:attachment":[{"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/media?parent=27273"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/categories?post=27273"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.affiliated1031.com\/es\/wp-json\/wp\/v2\/tags?post=27273"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}