1031 exchange selling property closing costs

[Reid Isaki]

I own 3 rental properties and am doing a1031 exchange on one. What closing costs can i deduct from this exchange? I want to keep accumulating carry over losses but am having trouble finding information about this.

everything i read about is what i can deduct when i purchase an investment property, not what i can deduct when selling.

is there nothing i can deduct from selling since i won't open that property anymore even though i have other rentals and try to pool all the losses together?

thank you

[Dave Foster]

@Reid Isaki, When you do a 1031 you are looking to defer tax on gain.  Yes, anything you put into the 1031 exchange will be indefinitely deferred.  The issue is that the IRS really doesn't care how much gain goes into the 1031.  Whatever gain goes in will be deferred.  But if you don't purchase at least as much real estate as your net sale and use all of the net cash in the purchases the IRS says that any difference is taking profit.  

So leaving some expenses out of the 1031 would be fine - if they don't appear on the settlement statement.  But anything that shows up on the settlement statement must be an expense of the sale.  And things like realtor commission, title insurance, etc have to be put on the settlement statement.  So you're kind of stuck on the sale side.

On the purchase side only actual expenses to close the purchase can come from 1031 proceeds.  The IRS does not give us a fixed itemized list of things that count.  But in general think of your purchase as a cash transaction. The things like title ins if applicable and closing fee etc are fine.  Technically, costs of finance do not count.  So origination fees,  and cost of buying points could not come from 1031 proceeds.  So you could use those to offset some other gain.  Also, expenses that cannot be put on the settlement statement like appraisal fee or inspection fees would work as well.

The problem on the purchase side is that you dont' have a lot of time to get your 1031 done so that your purchase happens in 2019.  

I also spose that any expenses to get the old property ready for sale could be deductible in the current year as long as your accountant agrees with not capitalizing them.