closing costs of 1031 exchange and Form 8824 (2023 Update)

When you complete a 1031 exchange, you will be responsible for paying certain closing costs, such as title fees, escrow fees, and other expenses associated with the transfer of the properties. These closing costs can be significant, and it's important to understand how they will be handled in the exchange.

In general, closing costs associated with the sale of the relinquished property can be used to acquire the replacement property in a 1031 exchange, as long as they are used to acquire the replacement property within 180 days of the sale of the relinquished property. This means that the proceeds from the sale of the relinquished property, including any closing costs, can be used to pay for the purchase of the replacement property.

When it comes to Form 8824, you will need to report any closing costs incurred in the 1031 exchange on this form. Form 8824 is used to report like-kind exchanges and must be filed with your federal income tax return for the year in which the exchange took place. On this form, you will need to report the closing costs incurred on both the sale of the relinquished property and the purchase of the replacement property. The IRS will then use the information provided on Form 8824 to determine the gain or loss that you have realized in the exchange and the amount of tax that you will owe, if any.

It's important to note that the tax laws and regulations related to 1031 exchanges and Form 8824 can be complex, and it's recommended to consult with a tax professional for specific guidance on your situation.

When filling out Form 8824 for a forward 1031 exchange, you will need to report the closing costs associated with both the sale of the relinquished property and the purchase of the replacement property.

Line 18 of Form 8824 is where you will report the "exchange expenses", which would include all of the closing costs for the sale of the relinquished property, the closing costs for the purchase of the replacement property, and any fees charged by the 1031 "trusted intermediary". These expenses are not added to the basis of either property, but are reported on the form in order to determine the gain or loss realized in the exchange.

Regarding the fair market value (FMV) of the properties, you will need to report the FMV of both the relinquished and replacement properties on the form. The actual amounts of the two transactions do not need to match the FMV of the properties, but you will need to justify any differences between them if there is a discrepancy. You can do this by providing appraisals, comparables, or other documentation that support the FMV of the properties.

It's important to note that tax laws and regulations for 1031 exchange can be complex, and it's recommended to consult with a tax professional for specific guidance on your situation.

And also make sure you've consulted with the intermediary and/or attorney that helped you with the exchange to ensure that you are reporting the information correctly on the form 8824.