4A — November 13 - 26, 2015 — M id A tlantic
Real Estate Journal
www.marejournal.com
M id A tlantic R eal E state J ournal By Pamela A. Michaels, Esq. Asset Preservation, Inc. What to do about expenses in a §1031 Exchange?(Part 2) I RS Form 8824, the tax form filed with IRS to report a §1031 exchange
Printing and Promotional Products IntegrityGraphics
Integrity Graphics is a full service provider of printed and promotional products. With our extensive network of manufacturers we can satisfy the printing needs of many businesses and industries. Whether you are looking for a specific item or just browsing for ideas, our site is your one-stop source. . . Your One-Stop Source Integrity Graphics/ Printing and Promotional Products Account Executive: Alan Aronson Office: 339-987-5533 ext.126 | Cell: 508-612-2438 Aaronson@i-graphics.net Visit our website at: i-graphics.net
Examples of these expenses include qualified intermediary fees, escrow closing costs and broker commissions. See e.g. Letter Ruling 8328011, Mer- cantile Trust Co. of Baltimore v. Comm, 32 BTA 82 (1935), Rev. Rul. 72-456, 1972-2 CB 468. Other selling expenses that might be excluded include transfer taxes, attorney’s fees, recording fees and the cost of the owner’s title insurance policy. Note however, that an excludable selling expense does not encompass all clos- ing costs or transactional ex- penses that may be paid with exchange proceeds within the
safe harbor provisions of the regulations. For instance, real estate taxes, rent and other prorations and adjustments are not excluded from amount realized in a taxable sale or added to the basis of the prop- erty by the buyer. Rather, they are operating costs incurred due to the ownership of the real property. Likewise, as to possible costs to remove or sat- isfy mechanic’s liens or other assessments. Transactional items that may be paid from exchange proceeds in an exchange, but are usually not considered selling expenses include loan related fees, such as points, mortgage insurance fees, ap- praisal fees, lender’s title in- surance premiums and other fees related to financing the acquisition of the replacement property. Such fees must gen- erally be amortized over the life of the loan, do not increase basis in the property and do not affect the calculation of realized or recognized gain. Rev. Rul. 70-360, 1970-2 CB 103, S&L Building Corpora- tion, 19 BTA 788 (1930). While the payment of such costs from proceeds may result in cash boot in the exchange, such expenses may be deductible as well. Some legal and tax advisors take the position that where financing is an express condition to closing in the pur- chase contract, the payment of finance related fees out of exchange proceeds should not generate boot. Security deposits, repair costs and prepaid rent that are allocated among buyer and seller in a purchase and sale contract through a stan- dard prorations clause, can be another source of taxable boot if not handled carefully. The prorations clause works by adjusting the amount of cash that must be paid by the buyer at closing. For example, a typical rent proration clause would credit the buyer with rents already received by the seller that are allocable to the period following the closing thereby reducing the amount of cash the buyer must deposit. Such a clause generates boot as the seller has, in effect, treated the prorated amount allocated to the buyer as part of the buyer’s consideration for the property. At closing, this cash is in the seller’s hands and does not pass to seller’s qualified intermediary to be continued on page 12A
transaction, provides that exchange ex- penses are to be deducted from the con- tract price in the determi- nation of re- alized gain.
Pamela Michaels
In this context, the term ex- change expense is not defined but appears to mean an ex- pense of sale that would be excluded from amount realized in a taxable sale transaction.
Exchange Smart. Security you can bank on
Pamela Michaels, Esq. Vice President / Division Manager Manhattan: 866.317.1031 | Long Island: 866.394.1031 pmichaels@apiexchange.com | apiexchange.com Call for a complimentary consultation.
A National IRC §1031 “Qualified Intermediary”
Made with FlippingBook - Online Brochure Maker