Posted by Mary on September 18, 2002 at 11:23:27:
Thanks Dave, you answered my question. Mary
1031? about security deposits - Posted by Mary
Posted by Mary on September 16, 2002 at 18:38:54:
Hi everyone, when you close on a deal and you are doing a 1031 exchange , can you pay the security deposits out of you proceeds? How about closing costs. Thanks
Re: 1031? about security deposits - Posted by Dave T
Posted by Dave T on September 16, 2002 at 23:11:56:
You have to clarify your question. I don’t understand how security deposits are part of a 1031 exchange. Perhaps some details concerning the transaction will help.
Your closing costs for the relinquished property are paid from the proceeds of the sale. Furthermore, the net proceeds from the sale of the relinquished property can be applied to both the purchase price and the closing costs for the replacement property.
Re: 1031? about security deposits - Posted by Mary
Posted by Mary on September 17, 2002 at 07:31:06:
Dave, Thanks. I am sorry, I am not being clear. Can security deposits due to the new buyer be paid out of my proceeds. I am pretty sure that I am reading that they cant. I believe the manual says something to the effect of any prorations that are not related to the transaction must be paid out of pocket. Is that right? THanks, Mary
Re: 1031? about security deposits - Posted by Dave T
Posted by Dave T on September 18, 2002 at 10:06:42:
I assume that you are using a tenant occupied property as the relinquished property in a 1031 like-kind exchange. It’s not really clear in your posts, so I am just guessing here.
If this is correct, then the security deposits are not really your money. The deposits belong to your tenants until they are forfeited for some reason. Many local jurisdictions have landlord/tenant laws that require security deposits to be kept in a separate escrow account, and, in my jurisdiction I must pay interest on the deposits.
Your buyer is acquiring your property subject to your existing leases. This also means that your buyer (as the new landlord) becomes responsible for the tenant’s security deposits. The security deposits should be transferred to your buyer outside of the 1031 exchange umbrella. If they are paid out of the proceeds of sale, then that amount is not protected by the 1031 exchange and may become “taxable boot” to you. To prevent this from happening, bring money to the settlement table for the total security deposits.