When closing on the sale of a property, you will likely incur a variety of expenses, and you may find yourself wondering what is and isn’t acceptable to debit off your closing statement. This is particularly important when you are making a 1031 exchange.
Any proceeds or cash benefits you receive from a 1031 transaction are known as boot. Boot is not part of a like-kind exchange, and is therefore considered taxable.Closing on a sale will always carry associated costs such as agents’ commissions and deed recording fees. It is acceptable to debit these off on your closing statement, because they do not represent any extra cash benefits for you. Expenses such as prorated rent and security deposits that must be transferred to the new owner are another story.
The correct way to deal with these is to write the owner a check from your own operating account. Debiting these expenses to your closing statement would result in a cash benefit in that money in your operating account would be freed for your use, and this money is considered to be boot.
In the process of a 1031 exchange, you will also face expenses related to the acquisition of new debt on your replacement property. Loan origination fees, underwriting fees, and processing fees are not part of a like-kind exchange and the money must come out of your own property.
The fact of the matter is that the IRS examines these sorts of transactions, and will not look kindly on your receiving non-like-kind proceeds or cash benefits from 1031 transactions. With this in mind, you should be wary and take care regarding what expenses end up on your closing statement.