Can I get reimbursed for repairs at closing?

[Ken Gurta]

I will be selling a rental house very soon. It should go on the FMLS in 2 weeks or so. I will be spending approximately $5000  on repairs before selling it. Can I ask to get back the money I spent for repairs at closing before my equity is sent to a 1031 exchange company? 

[Dave Foster]

@Ken Gurta, You can but you'll pay tax on that money.  The IRS looks at that as you taking profit not a reimbursement for expenses.  Those are either current expenses that you'll get to write off on this years taxes.  Or they'll be capitalized which means they'll go into the basis of the property.  And that basis stays in the 1031 according to the IRS.  If you touch money from the sale it's taxable.

[Ken Gurta]

@Dave Foster, Thanks for the advice. It's not exactly what I wanted to hear, but it makes sense. You explained it very well. Can you give me any advice on how to make sure 100% of my 1031 proceeds go to the purchase of my replacement property? I just went through this process a couple of months ago. Somehow a few hundred dollars were left in my 1031 after closing. Neither the title company, lender, or 1031 company could give an explanation. So I had to have the 1031 company send me a check that I will be taxed on.

[Dave Foster]

@Ken Gurta, It would have been a simple matter to simply over pay your down payment by a little bit.  Lenders get used to lending in %s.  But there's no reason why the down payment has to be a %.  We use a process that allows the lender to access your account statement (with your permission) so they know exactly how much to write the loan for.   That usually solves all.  But hey a few hundred bucks isn't much tax - hopefully you got a nice steak dinner with the overage :)