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1031 Exchange Documents

Settlement Statements

Sometimes in the rush to close, 1031 investors aren’t aware of settlement statement items that create tax liabilities. Careful attention to the closing statement can make for happier tax times.

A settlement statement uses expense or asset line-items to calculate payments. If the line-item is for a like-kind asset, its value can be included in an exchange. If the expense is related to the transfer of a like-kind asset, for relinquished property, it can be deducted from the deferred gain, or for the replacement property, it must be capitalized and added to book value.

If a line item is neither a like-kind asset nor a like-kind asset sale expenses, it gets complicated.

Example 1

Situation

  • Selling a warehouse and a truck
  • Doing an exchange on the warehouse, but not the truck
  • Warehouse value: $100,000
  • Truck value: $10,000
  • Total sales price: $110,000

Seller:

  • Sends the qualified intermediary (QI) $110,000
  • Uses the full $110,000 to buy the replacement property
  • Has tax due on the $10,000 truck proceeds!
    • The truck was personal property, not "like-kind" to the warehouse. Any other non-like-kind or personal property asset sold, such as prepaid insurance or related transfer expenses, is treated the same.

Solution

  • $10,000 could be paid to seller at closing, not the QI. The Seller keeps it for taxes and other uses
  • Just $100,000 sent to QI and used for to acquire Replacement Property

Example 2

Situation

  • Selling a warehouse with a $10,000 security deposit
  • Warehouse value: $100,000
  • Security deposit: $10,000
  • Total sales price: $100,000
  • New buyer sends QI $90,000, and assumes obligation to pay security deposit later
  • Seller/Taxpayer buys $90,000 replacement property
  • Seller has tax due on the $10,000 security deposit—money never received! Any liability like the security deposit, assumed for value by the buyer or related expense is treated similarly.

Solution

  • Get the $10,000 security deposit sent to the QI from new buyer at closing
  • Taxpayer reinvest the full $100,000 in replacement property

Protect Yourself!

Look at your settlement statement closely and consider the tax impact of each item, so you avoid unexpected taxes!

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Amegy Bank, California Bank & Trust, The Commerce Bank of Oregon, The Commerce Bank of Washington, National Bank of Arizona, Nevada State Bank, Vectra Bank Colorado, and Zions Bank are divisions of Zions Bancorporation, N.A., member FDIC.

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Important Details

The information contained herein is for informational purposes only and does not constitute tax, legal, or accounting advice. You are advised to seek appropriate professional advice regarding your specific facts and circumstances. All exchange and qualified intermediary services are offered through Exchange Services, LLC, a Utah limited liability company and affiliate of Zions First National Bank, California Bank & Trust, Vectra Bank Colorado, National Bank of Arizona, and Nevada State Bank.