WHAT COSTS CAN BE CONSIDERED ACCEPTABLE “EXCHANGE EXPENSES?”
WHAT COSTS CAN BE DEDUCTED?
A frequently asked question is “What expenses can be deducted from the exchange proceeds without resulting in a tax consequence?” Although the IRS has not published a complete list of qualifying expenses, there are some rulings that provide general parameters. Brokerage commissions can be deducted from the exchange proceeds (Revenue Ruling 72-456). Other transactional costs may also be able to be deducted if they are paid in connection with the exchange. (Letter Ruling 8328011).
WHAT ARE “EXCHANGE EXPENSES?”
Transactional costs that are referred to as “exchange expenses” on Form 8824 are not specifically listed but should generally include costs that are:
A. A direct cost of selling real property, which typically include:
Real estate commissions
Title insurance premiums
Closing or escrow fees
Legal fees
Transfer taxes
Notary fees
Recording fees
- or -
B. Costs specifically related to the fact the transaction is an exchange such as the Qualified Intermediary fees.
ITEMS THAT ARE NOT “EXCHANGE EXPENSES”
Although not a complete list, the costs related to obtaining the loan should not be deducted from the proceeds. These “non-exchange expenses” include:
Mortgage points and assumption fees
Credit reports
Lender’s title insurance
Prorated mortgage insurance
Loan fees and loan application fees
Other “non-exchange expenses” can include:
Property taxes
Utility charges
Association fees
Hazard insurance
Credits for lease deposits
Prepaid rents and security deposits
These rough guidelines do not address every potential cost. Exchangers should review their specific transaction and closing costs with their tax and/or legal advisors.
TM 1031 Exchange and Asset Preservation, Inc. do not give tax or legal
advice. The information contained herein should not be relied upon as a
substitute for tax or legal advice obtained from a competent tax and/or
legal advisor.
(c) Copyright 2005 Stewart Title Guaranty Company
