Typical Transaction Costs That Are Allowed
According to David Moore, normal transactional costs are usually acceptable when closing a 1031 Exchange. These are the standard expenses you would expect to see in a real estate transaction. Examples include:
- Sales commissions
- Legal fees
- Finder’s fees
- Escrow fees
- Inspection or testing fees
- Transfer taxes
- Title insurance fees
- Recording fees
- Property taxes
Exchange or combination fees are also in the yes category because they are directly tied to facilitating the transaction. Other routine administrative costs such as messenger fees, document preparation fees, statement fees, tax service fees, processing fees, and notary fees are generally considered valid as well.
Common Fees That Are Not Allowed
Certain costs cannot be paid with Exchange funds because they are not part of the transaction itself or they relate to personal property improvements. David Moore lists the following as clear no items:
- Homeowners’ association dues
- Repairs or maintenance work
- Termite work or pest treatment
- Security deposits
- Replacement property loan acquisition fees
Paying any of these out of Exchange proceeds could cause problems with the IRS and potentially disqualify the Exchange.
The Gray Area: Appraisal Fees
One fee that falls into a maybe category is the appraisal fee. David Moore says an appraisal fee is typically acceptable when it supports the property valuation as part of the transaction. However, treat these costs carefully and confirm they are tied to the Exchange rather than the taxpayer’s personal benefit.
Key Takeaway
David Moore’s guidance highlights a simple but important rule for any 1031 Exchange: only pay for costs that are necessary to complete the transaction. Normal closing expenses like commissions, escrow, and title fees are fine. Personal, maintenance, or financing related costs should never be paid with Exchange funds. By keeping these distinctions clear, investors can avoid IRS scrutiny and help ensure their 1031 Exchange stays fully compliant.
Ready to Plan Your Next Exchange?
The right strategy can make the difference between a smooth 1031 Exchange and one that triggers unexpected taxes. If you are preparing for a sale or want to make sure your next Exchange is fully compliant, contact David Moore and his team to discuss your transaction and get guidance tailored to your situation.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
