Earnest Money Deposits and Deductible 1031 Closing Costs

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In a 1031 exchange, there are selling and purchasing expenses found on the HUD settlement statement. Many of these expenses can be paid by the exchange proceeds without constituting taxable boot.

When selling the old property, the following expenses can be paid from the exchange proceeds:

• commissions;
• finder's fees;
• inspection and testing fees;
• title insurance premiums;
• escrow fees;
• transfer taxes;
• recording fees;
• intermediary fees;
• legal fees.

The following expenses and costs related to the acquisition of a loan for the replacement property should not be paid from the exchange proceeds.

• loan fees;
• points;
• loan application fees;
• mortgage insurance:
• lender's title insurance;
• assumption fees;
• other costs associated with securing the loan.

Earnest Money Deposit

When selling the Exchangor may receive cash as a security deposit. If the deposit or earnest money deposit is not returned at the closing the cash is taxable.

When buying, the Exchangor may request the earnest money deposit be paid from the exchange proceeds. This should only be done after the purchase contract has been assigned to the qualified intermediary. If the earnest money deposit is paid by the Exchangor prior to the closing, the deposit can be refunded at the closing.

Payment of additional fees may trigger taxable boot if the non-exchange expenses do not represent a payment capitalized in the cost of the replacement property. These costs may include architect and design fees and permits. The rule is if these items are typically found on the settlement statement, then they can be paid by the intermediary.

Require a clarification? Call us at 850-496-0090 or send an email to andgus@atlas1031.com.