By: Breana Behrens
Exchange expenses are transactional costs that relate to the cost of selling or buying the properties (such as land surveys, real estate commissions, prorated taxes, closing or escrow fees, legal fees, and recording fees) or the usual and customary costs specifically related to the fact the transaction is an exchange (such as QI fees, escrow closing costs, and broker commissions).
Operating costs that accrue due to ownership of the property are not considered exchange expenses. These include: mortgage points and assumption fees, credit reports, lender’s title insurance, prorated mortgage insurance, loan fees, property taxes, utility charges, association fees, hazard insurance, credits for lease deposits and prepaid rents and security deposits.
Generally: to qualify for a 1031 exchange you are required to reinvest all net sale proceeds of your sold property in the like-kind replacement property within the allowed timeframe (180 days). Thus, any non-like-kind property or property acquired that is less or more than the replacement property, or the boot, will be recognized gain and subject to real estate transfer taxes.
Exchange expenses must be factored in appropriately to ensure that you qualify for a 1031 exchange. You must be careful not to use funds to pay expenses not related to the exchange, which could invalidate the exchange and require you pay taxes on the transaction. Exchange expenses can also generate or affect your boot, which may also subject you to the real estate transfer taxes.