1031 exchange - Posted by techin

Posted by techin on September 08, 2005 at 13:58:22:

Thank you, Tim.

I understand that the expenses can be deducted one way or the other. The followup question is whether the money can be paid out of the escrew account without disrupting or invalidating the exchange. If possible, I do not want to pay $10,000 of capital expenditure and repair out of my pocket.


1031 exchange - Posted by techin

Posted by techin on September 07, 2005 at 18:08:16:

I am selling my rental house, and it is currently in escrew. I am going to do a 1031 exchange. I understand that I cannot take any money out of the escrew into my pocket.

There are expenses such as removing termite infestration that are required per contract agreement; there are also expeneses that are not in the contract such as installation of new carpet.

My question is: could these expenses be paid out of escrew to the corresponding repair companies without ruining the 1031 exchange?

I have asked the question to my exchange officer. She told me that it would not ruin the exchange, but I may have to pay tax at year end. But how would the IRS knows since I will not be issued an 1099?

Any help will be greatly appreciated.


Re: 1031 exchange - Posted by Tim

Posted by Tim on September 07, 2005 at 18:49:49:

I’m pretty sure that the money you spend would be a deductible expense on your 1040 Schedule E. Even it were a capital expenditure, you would increase the basis of the property (less depreciation which IS expensed), which would either increase the basis in the property you purchase, or would decrease your capital gains tax if you didn’t buy another property.

The IRS wouldn’t know, so you have to tell them in the language they understand which is your tax forms.

Somebody please correct me if I’m missing something, but I don’t see this triggering a tax.