1031 Experts - What is Boot and what isn't? Appraisals, Inspection, Surveys, Insurance, RE Tax, Etc?
In the middle of my first 1031. Of course my 1031 exchanger referred to their attorneys when I asked these questions. Yes, I will of course ask my tax professional as well. I am just curious to hear what other 1031 seasoned veterans have done. Apologies if I use any terminology incorrectly - I have a good understanding, but not so good with the terminology.
PS: my new property will be of greater loan value and property value. One for one exchange. I'll be putting 25% down and taking a mortgage. Funds from the sale of the exchanged property are greater than 25%. Trying to make sure I do things correctly and not create headaches during tax time, but also have the least amount of out of pocket expenses for the new purchase...
Which of the following are boot?
Appraisals?
Payment of appraisal fees, inspections, surveys and environmental studies are also typically considered taxable boot if they are used to obtain a new loan for the replacement property. If, however, the Purchase and Sale Agreement for the replacement property was specifically made contingent upon the satisfactory completion of these items, the Exchanger could argue that these expenditures were really for the purchase of the property and not to obtain a new loan.
My sale contract states: "This sale IS conditioned on the appraisal of the Property being not less than the Sale Price..." I would argue that the sale agreement is contingent upon the appraisal - this is completely separate from the lender requirements which happen to align with this as well. However, the bank did order the appraisal - so maybe safer to leave off?
Inspections?
It was not my bank's requirement to have an inspection. I did this on my own. Simply an investor doing his due diligence. I will keep this out of pocket, but I don't buy the argument this can't be included. My exchanger's handout includes "agreed property inspections" under the non-boot category...
Surveys?
In this case, an elevation cert survey. Again, I did this out of pocket - not at my banks request - because it is something I would do for any new property - regardless of whether a mortgage or buying with cash.
Insurance? / Tax?
I lump these together because I think they are treated similarly. I think I understand the following as: you may safely use 1031 Funds to pay insurance premiums and RE tax at closing without repercussions.
Prorated property taxes, insurance payments and rents are usually considered deductible ongoing operating expenses and not part of the exchange, but the payment of these items will not interfere with the safe harbor.
Title Insurance/Closing Fees?
Do not create taxable boot.
Loan Fees/Points/PMI?
Everyone seems to agree that these are taxable boot. I guess this includes origination fees?