1031 exchange mortage in excess of value

Dear 1031x.com: 

1.  Are buyer credits (e.g., seller rent back to buyer and proration/adjustment credits) considered cash received by the taxpayer in the exchange?  If not, how do I treat these credits on Form 8824?

Regarding the property given up in the exchange:

2.  I assume the Exchanger deducts the closing costs incurred on the Schedule E for that property, not the Form 8824.

3.  During the exchange, the existing mortgage on the property was paid off.  To pay off the entire balance, the Exchanger used the proceeds from the exchange plus some of his own money.  What is the effect of such a transaction?  Are any of these items considered boot?

Dear Mr. G:  I am going to answer your question is brief.

 

1: Certain seller credits especially rent prorations, security deposits and advance property tax prorations create boot items for the seller (exchanger). 

 

2.  The expenses directly related to the sale of the property can be treated as exchange expenses and effectively reduce the sale price of the property.  It is usually better to treat these as exchange expenses rather than as operating expenses on Schedule E. 

 

3. The general rule of 1031 exchanges is that to defer all tax liability the exchanger must trade equal or up in value.  If the relinquished property had mortgage in excess of value this does not change the general rule.  Paying off mortgage in excess of value will have no direct effect on the exchange.  

 

I hope this helps.  

Steve Hickox
Attorney / President

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