1031x and seller repair credit
Most Popular Reply
@Daria B. it sounds like you were the seller, you have the credit, and you did a 1031. If that’s correct, here’s my non-expert opinion.
You lowered the amount you had/have to buy with your exchange. (You only have to buy as much as you net from the sale, this lowered your n.)
You reduced the amount of untaxed capital gains you’re carrying forward but you didn’t create an expense or a deduction today. I BELIEVE this credit would be treated just like covering buyer’s closing costs.
Certainly talk to your CPA or your 1031 QI, both of which should have had a 10 second explanation at the tip of their tongue. But that’s how I would expect it to play out.
8 Replies
- Investor · Hendersonville, NC · Member since 2016 · 498 posts · 285 votes1y
Quote from @Daria B.:
Hi
Repairs were going to be paid for before closing, as the seller having some other time sensitive activities needing to be met, my agent and I decided to grant a seller credit to the buyer for these repairs. Otherwise the hold up of the sale and going back-and-forth we wanted to avoid.
Because it’s now on the closing statement, are these a deductible repair expense like it would have been had it been before closing that would normally just be under schedule E as a repair expense.
Cheers.
Since the seller credit is now part of the closing statement, it’s generally treated as an adjustment to the purchase price rather than a direct repair expense. That means it likely wouldn’t be deductible under Schedule E the same way an out-of-pocket repair before closing would have been. Instead, it could impact your cost basis in the property, which would affect depreciation and future tax calculations. Has the property closed?
Quote from @Dominic Mazzarella:
Quote from @Daria B.:
Hi
Repairs were going to be paid for before closing, as the seller having some other time sensitive activities needing to be met, my agent and I decided to grant a seller credit to the buyer for these repairs. Otherwise the hold up of the sale and going back-and-forth we wanted to avoid.
Because it’s now on the closing statement, are these a deductible repair expense like it would have been had it been before closing that would normally just be under schedule E as a repair expense.
Cheers.
Since the seller credit is now part of the closing statement, it’s generally treated as an adjustment to the purchase price rather than a direct repair expense. That means it likely wouldn’t be deductible under Schedule E the same way an out-of-pocket repair before closing would have been. Instead, it could impact your cost basis in the property, which would affect depreciation and future tax calculations. Has the property closed?
Yes, last year and that’s all over with now. I thought about this when I was getting all my documents together for this years taxes.
Impact cost basis, how may I ask?- Investor · Hendersonville, NC · Member since 2016 · 498 posts · 285 votes1y
Quote from @Daria B.:
Quote from @Dominic Mazzarella:
Quote from @Daria B.:
Hi
Repairs were going to be paid for before closing, as the seller having some other time sensitive activities needing to be met, my agent and I decided to grant a seller credit to the buyer for these repairs. Otherwise the hold up of the sale and going back-and-forth we wanted to avoid.
Because it’s now on the closing statement, are these a deductible repair expense like it would have been had it been before closing that would normally just be under schedule E as a repair expense.
Cheers.
Since the seller credit is now part of the closing statement, it’s generally treated as an adjustment to the purchase price rather than a direct repair expense. That means it likely wouldn’t be deductible under Schedule E the same way an out-of-pocket repair before closing would have been. Instead, it could impact your cost basis in the property, which would affect depreciation and future tax calculations. Has the property closed?
Yes, last year and that’s all over with now. I thought about this when I was getting all my documents together for this years taxes.
Impact cost basis, how may I ask?
Since the credit was applied at closing, it likely reduced the buyer’s cost basis rather than being deductible as a repair expense. Essentially, instead of being able to write it off immediately, it lowers the purchase price for tax purposes, meaning depreciation will be calculated on a slightly lower amount over time. If you’re still sorting through your taxes, it might be worth running it by your accountant. @Daria B. it sounds like you were the seller, you have the credit, and you did a 1031. If that’s correct, here’s my non-expert opinion.
You lowered the amount you had/have to buy with your exchange. (You only have to buy as much as you net from the sale, this lowered your n.)
You reduced the amount of untaxed capital gains you’re carrying forward but you didn’t create an expense or a deduction today. I BELIEVE this credit would be treated just like covering buyer’s closing costs.
Certainly talk to your CPA or your 1031 QI, both of which should have had a 10 second explanation at the tip of their tongue. But that’s how I would expect it to play out.
Quote from @Dominic Mazzarella:
Quote from @Daria B.:
Quote from @Dominic Mazzarella:
Quote from @Daria B.:
Hi
Repairs were going to be paid for before closing, as the seller having some other time sensitive activities needing to be met, my agent and I decided to grant a seller credit to the buyer for these repairs. Otherwise the hold up of the sale and going back-and-forth we wanted to avoid.
Because it’s now on the closing statement, are these a deductible repair expense like it would have been had it been before closing that would normally just be under schedule E as a repair expense.
Cheers.
Since the seller credit is now part of the closing statement, it’s generally treated as an adjustment to the purchase price rather than a direct repair expense. That means it likely wouldn’t be deductible under Schedule E the same way an out-of-pocket repair before closing would have been. Instead, it could impact your cost basis in the property, which would affect depreciation and future tax calculations. Has the property closed?
Yes, last year and that’s all over with now. I thought about this when I was getting all my documents together for this years taxes.
Impact cost basis, how may I ask?
Since the credit was applied at closing, it likely reduced the buyer’s cost basis rather than being deductible as a repair expense. Essentially, instead of being able to write it off immediately, it lowers the purchase price for tax purposes, meaning depreciation will be calculated on a slightly lower amount over time. If you’re still sorting through your taxes, it might be worth running it by your accountant.Ok, I get it. And that’s fine it’s not like I will out live the depreciation. I did out live the one I exchanged and one reason why I did an exchange. Even though we want a higher amount write off for depreciation but I get it.
Quote from @Bill B.:
@Daria B. it sounds like you were the seller, you have the credit, and you did a 1031. If that’s correct, here’s my non-expert opinion.
You lowered the amount you had/have to buy with your exchange. (You only have to buy as much as you net from the sale, this lowered your n.)
You reduced the amount of untaxed capital gains you’re carrying forward but you didn’t create an expense or a deduction today. I BELIEVE this credit would be treated just like covering buyer’s closing costs.
Certainly talk to your CPA or your 1031 QI, both of which should have had a 10 second explanation at the tip of their tongue. But that’s how I would expect it to play out.
Correct. The sale happened last year. I was the seller doing a 1031x and it lowered the net sale.
I didn’t realize the closing statement items were handled a different way and not included on the SchE. It’s all good now and this was just a question since it related to repairs but ended up being a seller credit instead of my coming out my pocket to do repairs. I guess had there been time I could have done it to assure it would be a deductible on SchE rather than a closing (basis) side of the house.
Thx!- 1yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
Quote from @Daria B.:
Even if you performed the repairs, they probably would not have been deductible on Sch E anyway. They would either be capital improvements or costs of selling, most likely.
Also, it appears from your comments that you do not have a full understanding of how depreciation works post-1031. Make sure to discuss it with your accountant.
- 1yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
@Daria B. A seller repair credit on the closing statement during a 1031 exchange is not a deductible repair expense. Instead, it reduces the seller's net sale proceeds, which may impact the amount required to be reinvested to fully defer capital gains taxes.
For the buyer, the credit lowers the property’s basis rather than being deductible as a repair expense. This means the buyer cannot write it off immediately but may recover the cost through depreciation over time.
To maximize tax deferral, sellers should consider negotiating a price reduction instead of a repair credit to avoid potential taxable boot (excess cash retained). Consulting a 1031 exchange accommodator and a CPA ensures compliance with IRS regulations and minimizes unintended tax liabilities.
This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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