Understanding the difference between permissible and non-permissible selling expenses is difficult. The line between the two is not well defined in law or most cases. However, the consequences certainly are. In the worst case, a failed exchange. In the less extreme, “boot” for the investor to pay tax on.
However, there are enough guidelines to avoid the grey areas of an exchange.
The following are permissible and non-permissible expenses:
Permissible
Escrow agent, settlement agent or closing attorney fees
Real estate broker's commissions
Tax advisor fees related to the disposition or acquisition
Attorney fees and costs related to the disposition or acquisition
1031 Exchange Qualified Intermediary fees
Finder fees or referral fees
Recording or filing fees
Documentary transfer taxes
Owner's title insurance premiums
Non-permissible
Financing or lender costs such as loan fees, loan points, appraisal fees, mortgage insurance premiums, lender's title insurance policy premiums, and other loan processing fees and costs
Insurance premium payments
Repairs and/or maintenance costs
Prorated Property taxes
Prorated rents
Security deposits
Payoff of credit card balances
This simple list does no justice to the potential complexities of this transaction. There is no substitute to engaging tax, legal and financial 1031 experts prior to starting your exchange. Most non-permissible items can be avoided with a properly structured deal.
Best
Josh
