Q: What expenses are non-allowable and could trigger boot in a 1031 exchange? Check your Closing Statement

In a 1031 exchange, boot refers to any non-qualifying property received during the transaction, which becomes taxable. To avoid boot when closing the sale of your relinquished property, it’s essential to properly handle specific items.

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Some items, such as tax prorations or interest on loans, should be wired directly to the closing agent to avoid boot. While these can potentially be claimed as expenses on Schedule E, paying them in cash at closing ensures a cleaner transaction with full tax benefits.

However, items like security deposits or prepaid rent must be wired to the closing agent without exception. If not, they will trigger boot and result in taxable income.

Certain expenses, including broker fees, title insurance, and escrow fees, are not considered boot and are safe to include on the closing statement.

Ensuring the proper handling of these items can help you avoid unintended tax consequences and successfully complete your 1031 exchange. Always consult your tax advisor to ensure compliance with IRS regulations.