When selling or purchasing an investment property in a IRS 1031 exchange purposes are:
Real estate broker’s commissions, finder or referral fees
Owner’s title insurance premiums
Closing agent fees (title, escrow or attorney closing fees)
Attorney or tax advisor fees related to the sale or the purchase of the property
Recording and filing fees, documentary or transfer tax fees
Closing expenses which result in a taxable event are:
Pro-rated rents
Security deposits
Utility payments
Property taxes and insurance
Associations dues
Repairs and maintenance costs
Insurance premiums
Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections and other loan processing fees and costs
To reduce the taxable consequences of these operating, financing and other closing fees, try to:
Pay security deposits, pro-rated rents and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent.
Treat accrued interest, prorated property tax payments or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property.
Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement.
Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to