Your Guide to a Successful 1031 Exchange - Part 1

We are pleased to introduce Bill Exeter, CEO of Exeter 1031 Exchange Services, LLC as one of our nationwide investment expert partners. As a leading national provider of comprehensive 1031 Exchange services, Bill Exeter has contributed the following article from his 1031 Exchange Guidebook on our website to provide valuable insights for investors in the area of 1031 Exchanges.

You should always consult with your legal, tax and financial advisors before completing any real estate or income tax related transaction to ensure compliance with all codes, regulations, and rulings. No one knows your circumstances better than your professional advisors.

Deferring 100% of Your Income Taxes

To defer all of your Federal, and in most cases, state, capital gain and depreciation recapture income taxes on the sale of investment property, you must meet certain reinvestment requirements. 

Generally, to defer all of your income tax liabilities, you must do the following: 

  1. Acquire one or more replacement properties with an aggregate purchase cost equal to or greater than the sale price of the relinquished property you sold (based on the net sale price, not equity or gain); 
  2. Reinvest all net cash proceeds (net equity) received from the sale of your relinquished property; and 
  3. Replace the amount of debt paid off on the sale of your relinquished property with new debt or out-of-pocket cash on the replacement properties you acquire. 

You can always put more cash into the purchase of your replacement property. You cannot pull cash out of the sale of your relinquished property transaction without incurring an income tax liability. 

Permissible and Non-Permissible Expenses

1031 Exchange proceeds can be used to pay for certain routine selling expenses related to the sale of the relinquished property and for certain routine purchase costs related to the acquisition of the replacement property without creating an income tax liability. However, if 1031 Exchange proceeds are used to pay for operating costs, financing (lender) related charges, or other non-routine expenses, you will recognize some income tax liability. 

The more common permissible and non-permissible 1031 Exchange expenses, closing or settlement costs and charges are listed below. Routine permissible and non-permissible 1031 Exchange expenses and closing or settlement costs can vary by geographic region based on common practices, local standards and customs.

Permissible Selling Expenses and Closing Costs

  • Owner’s title insurance policy premiums 
  • Escrow agent’s, settlement agent’s, or closing attorney’s fees 
  • Real estate broker’s commissions 
  • Finder fees or referral fees 
  • 1031 Exchange Qualified Intermediary’s fees 
  • Documentary transfer taxes 
  • Recording or filing fees 
  • Attorney’s fees and costs directly related to the transaction 
  • Tax advisor’s fees directly related to the transaction

Non-Permissible Operating Expenses, Financing and Closing Costs

  • Financing or lender related costs such as prorated interest expense, loan fees, loan points, appraisal fees, mortgage insurance premiums, lender’s title insurance policy premiums, and other loan processing fees and costs 
  • Prorated property taxes 
  • Prorated rents Insurance premium payments 
  • Security deposits 
  • Payoff of credit card balances 
  • Repairs and/or maintenance costs

 

You should always review a copy of your estimated closing or settlement statement with your tax advisor prior to any closing. 

 

We hope the insights provided by Bill Exeter of Exeter 1031 Exchange Services, LLC in this article have been informative and beneficial. We at CBC Capital Advisors are proud to partner with such a distinguished firm. Together, we are committed to facilitating a seamless 1031 exchange process for our clients. Our collaboration ensures that you receive comprehensive support and guidance, making your exchange experience as smooth and efficient as possible.

For the past 40+ years it has been our honor and pleasure to help clients achieve their investment goals through commercial real estate investing through…

  • Our Exclusive Nationwide Investment Network
  • Off-Market Commercial Real Estate Opportunities – Nationwide
  • and Saving Taxes with 1031 Exchanges

To Learn More, Give CBC Capital Advisors a Call at (806) 793-0888

In addition, you can learn all about our exclusive nationwide investing network and capabilities by watching Rick Canup’s short investment presentation below.