Calculating Net Proceeds needed to buy replacement property

[Maria A A.]

Is there a way to legally factor in valid selling expenses like painting, carpeting, new appliance, etc which were paid prior to escrow to reduce the net amount of property you need to replace as part of a 1031 exchange? Excluding these costs actually overstates the amount of ACTUAL net proceeds you receive from your 1031 exchange.

[Bill Exeter]

Hi @Kevin Geary, 

It is actually the Net Sale Price and not the Net Proceeds that matters. The Net Sale Price is computed by taking the Gross Sale Price of $230,000 and subtracting routine selling expenses such as real estate agent's commission, title fees, escrow closing fees or attorney closing fees, recording fees, documentary transfer taxes, 1031 Exchange fees, etc. (but not other closing costs such as prorated rents, prorated property taxes, lender costs/charges, HOA fees, etc.). The Net Sale Price is the amount that you must reinvest in order to defer all of the taxable gain. So, in this case, the Net Sale Price will likely be around $215,000 (ish). If they reinvest only $50,000, they will have traded so far down in value that all of their taxable gain will be recognized and they will pay all of their taxes. The government takes the position that he/she owns an asset that is worth $230,000, and they allow him/her to defer all of the taxes if they remain fully invested at $230,000 (or in this case the Net Sale Price of about $215,000). If they trade down, the amount they trade down by is all taxable. Their adjusted cost basis is NOT prorated or written off against the sale first like your client thinks.