1031 Basics

Qualified Intermediary

1031 Timeframes

Property Identification

Napkin Rule

Construction Exchanges

Reverse Exchanges

Exchanger: Partnerships/Corporations/Individuals

Relinquished Property - Holding Period

Relinquished Property - Personal Residence

Relinquished Property - Foreign Properties

Relinquished/Replacement Property - Acceptable/Non-Acceptable Expenses

The only authorities dealing with the treatment of selling expenses are Rev. Rul. 72-456, 1972-2 C.B. 468, and G.C.M. 34895 (June 5, 1972). The ruling indicates that cash received by a taxpayer in an exchange is offset by commissions paid in computing amount realized and gain recognized, and the amount of the commissions is also added in determining the basis of the replacement property. The writings only deal with commissions, but it is believe that its principles can be interpreted to cover all selling and "exchange" expenses incurred in either the disposition of the relinquished property or the acquisition of the replacement property. Accordingly, any selling expenses paid out of the exchange balance may result in taxable boot to the taxpayer. It is often looked at that such expenses should include all those that are typically deducted by the seller from the gross sales proceeds in a taxable sale under Section 1001, or capitalized by a buyer and added to the basis of the property acquired under Section 1012. Such expenses typically include commissions, finder's fees, inspection and testing fees, title insurance premiums, escrow fees, transfer taxes, recording fees and legal fees. These expenses will be referred to as "selling expenses." Expenses such as the proration of rents, property taxes, utilities and property insurance premiums debited against the taxpayer out of the exchange balance are not selling expenses and should be taxable as ordinary income to the taxpayer outside of the Section 1031 rules to the extent they are not netted against amounts credited to the taxpayer for these items. If there is a net credit for these amounts that is used to acquire replacement property, such credit should, additionally, be treated as cash paid by the taxpayer and thus either increase the basis of the replacement property or reduce the gain recognized. Loan fees, points, loan application fees, mortgage insurance, lender's title insurance, assumption fees and other costs related to the acquisition of a loan for the replacement property should also not be treated as selling expenses because these costs generally are treated as part of the cost of obtaining a loan rather than the cost of obtaining the property, and do not increase the basis of the replacement property. Therefore, if those loan-related expenses are paid out of the exchange balance, they should constitute taxable boot in the form of cash received by the taxpayer. These expenses can, however, be offset by cash boot paid by the taxpayer and would be amortized over the term of the loan.

Q-1a. How should exchange related intermediary and escrow or trustee fees be treated?

A-1a These fees are directly related to the exchange and therefore should be treated the same as other selling expenses.

Q-1b. When can selling expenses be paid from the exchange balance?

A-1b In general, selling expenses can be paid at any time during the exchange period without affecting any of the safe harbors under Reg Section 1.1031(k)-1(g) if they are transactional items under Reg Section 1.1031(k)-1(g)(7); otherwise, they must be paid in accordance with the limitations set forth in Reg Section 1.1031(k)-1(g)(6).