How are closing costs handled in a 1031 Tax-deferred Exchange?
Exchange Parties, closing agents, escrow officers, and tax advisors have struggled with the many issues presented by the variety of expenses and cash payments associated with closing the properties in exchange transactions. To make matters less certain, there is little authority in the Internal Revenue Code or Treasury Regulations as to how to treat the closing cost items commonly seen on settlement statements. The following are answers based on existing authority to typical issues seen on settlement statements. Given the general rule that an Exchange Party must transfer all equity in the Relinquished Property to the Replacement Property, the issue is whether the Exchange Party will be taxed on the amount of the sale proceeds used to pay typical sale and purchase settlement expenses. Revenue Ruling 72-456 specifies that real estate sale commissions paid are offset against the sale proceeds received provides some guidance. The purchase commissions paid are added to the basis of the Repl
