Do loan fees, points and rate buy-downs paid from exchange funds count as boot?

§461(g) already told you what points are: a charge for the use of money

Section 461(g)(1) says interest paid by a cash-method taxpayer that is allocable to a period after the close of the year in which it is paid 'shall be charged to capital account and shall be treated as paid in the period to which so allocable.' Points and a rate buy-down are exactly that: a lump sum that lowers the interest you will pay over the years ahead.

The only escape hatch is §461(g)(2), and it is written for points 'paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer.' A replacement property you bought to hold for investment is not a principal residence, so the deduction stretches over the loan term.

If the Code treats the payment as interest spread across a decade, it cannot simultaneously be part of what you paid for the building. That is the whole argument, and it is why intermediaries put the lender's column on the taxable side.

The rest of the lender's column attaches to the loan, not to the deed

Reg. §1.446-5 defines debt issuance costs as 'those transaction costs incurred by an issuer of debt (that is, a borrower) that are required to be capitalized under §1.263(a)-5', and directs that the issuer 'treats the costs as if they decreased the issue price of the debt.' They are absorbed into the yield on the note and deducted across its life.

That routing matters for your exchange because the replacement property's basis never sees them. Form 8824 offers only two homes for a cost: line 15, which subtracts 'any exchange expenses you incurred' from the money treated as received, and line 18, which adds the leftover to basis. A cost that belongs to the note qualifies for neither.

Nor does the safe harbor help. Reg. §1.1031(k)-1(g)(7)(ii) disregards items that 'appear under local standards in the typical closing statements as the responsibility of a buyer or seller', and a borrower's obligations to its lender arise from the loan documents, not from the purchase contract.

The specific lines to move off the intermediary's wire

Every one of these is charged because you borrowed. Pull them into a separate personal wire and the question disappears. Which items on the rest of the statement your intermediary may fund is covered in which closing costs can be paid from exchange funds.

• Discount points, rate buy-downs, rate-lock and extension fees.
• Origination, underwriting, processing, document-preparation and application fees.
• The lender's title insurance policy, as distinct from the owner's policy.
• Lender-required appraisal, review appraisal, property-condition report and flood certification.
• Credit reports, tax-service fees and mortgage insurance premiums.
• Escrow impounds and reserves for taxes, insurance and replacement, which fund your future expenses rather than the purchase.

Worked example: $15,000 of points on a hypothetical $1,200,000 replacement

Assume a fully deferred exchange on paper: $1,200,000 of proceeds held by the intermediary, a $1,200,000 replacement, a new $700,000 loan, and $15,000 of points the lender wants at closing. Let the intermediary fund the points and only $1,185,000 reaches the seller, so $15,000 of your gain is recognized.

If your depreciation history puts that $15,000 in the unrecaptured §1250 layer, the federal cost is up to 25% plus the 3.8% net investment income tax, roughly $4,320, before any state tax. If cost segregation left §1245 components in the building, the same $15,000 can be taxed as ordinary income instead; the stacking order is set out in is boot taxed as recapture or capital gain first.

Now fund the points yourself. You wire $15,000 to escrow from your operating account, the intermediary sends the full $1,200,000 to the seller, nothing is recognized, and the $15,000 is deducted over the loan term anyway. Same cash out the door, roughly $4,320 of federal tax saved. The figures are round and hypothetical, meant to show the size of the mistake rather than to forecast your bill.

• Points funded by the intermediary: $1,185,000 reinvested, $15,000 of boot.
• Points funded personally: $1,200,000 reinvested, $0 of boot, same $15,000 spent.
• The added cash also raises your basis in nothing; the points are recovered through interest deductions, not depreciation.

Why two competent advisors will give you different answers here

There is no revenue ruling, regulation example or reported case that says a lender's charge paid from exchange funds is boot. The conservative reading is the one above and the one Legal 1031 and IPX1031 publish: the item is not an expense of acquiring real property, so the dollars spent on it are recognized.

The other reading is a netting argument. If you bring outside cash to the replacement closing at least equal to the lender's charges, every exchange dollar is traceable to the purchase price and your own money paid the lender. That is an accounting position, not an authority, and it collapses if you bring no outside cash.

Your CPA or attorney should make this call on your facts and document it before closing, because the position shows up on your return rather than on the intermediary's. Breakwater Exchange is a 1031 exchange broker and does not give tax advice (who does what).

What to do in the week before the replacement closing

Ask the lender for the closing disclosure early, split it into a borrower column and a purchase column, and tell escrow which wire pays which. Give your intermediary a funding instruction that names the seller's proceeds and the transactional items only.

If your outside cash is tight, consider whether the loan is the right size at all, or whether some of the exchange belongs in a replacement that carries its own non-recourse debt. A Delaware Statutory Trust arrives with the loan already inside the trust and no lender charges for you to fund (how that debt counts).

• Confirm the intermediary's wire amount equals the purchase price plus qualifying transactional items, to the dollar.
• Send your own wire the same morning, from an account that never held exchange money.
• Keep both wire confirmations with the closing disclosure; they are the record that supports the split.