Does Realtor Commission = Boot?

Question

I'm considering selling my first rental house.  However, after doing some quick math, I've determined that it's going to cost me about $28k to sell the house.  Of that, about $17k will go to the realtors.  The remaining $11k is for repairs, holding costs, closing costs, etc.

That pretty well eats up all of my personal funds.

My question: Is it considered boot to spend the money that I receive from the sale of the house to pay the realtors?  Or, do I have to pay them from my personal funds in order to avoid taxes on that $17k?

Ryan

Chris Brown · Answer

Real estate commissions, closing costs, attorney fees and exchange fees are allowable expenses that can be paid from the proceeds of sale and not be classified as boot.  Repairs, it depends.  Where the repairs a condition of the sale?  If so, perhaps these can be reimbursed...  Where the repairs work done on the property during ownership?  Then, these would be added to your basis and carried forward to the new property.

In general, to receive 100% deferral as part of an exchange, you have to buy a new property or properties that are equal to or greater in value than the property that was sold.  However, allowable expenses can reduce this amount.  Sometimes this is referred to as your "Strike Price" which is calculated by taking the sales price and subtracting allowable (commissions, closing costs, tax stamps, exchange fees etc.).   So, say your sales price is $350K and you have $28K in allowable expenses.  Your goal for complete deferral is to buy new investment property or properties with a value that exceeds $322K.

Dave Foster · Answer

@Ryan Wamsat, To defer all tax you must purchase at least as much as your net sale (the contract price minus closing costs/commissions/things on the settlement statement).  So in your case you're going to find that your reinvestment target is much lower so probably doable for you.

The second half of the reinvestment requirement is that you use all of the net proceeds (the cash left after all closing costs and the mortgage is paid).

One of the easiest ways to figure your reinvestment target is to take the amount of cash that will actually go into your exchange account plus the amount of mortgage that was paid off = your reinvestment target.

@Chris Brown brings up a good point on repairs.  If you want those counted as costs of the sale they'll need to be on the settlement statement.

Ryan Wamsat · Answer

@Chris Brown Thank you for describing it so well.  It answered all of my questions!

I appreciate your fast response.

Ryan