The short answer
Prorations are the closing-day adjustments that divide rent, property taxes and similar running items between seller and buyer by the days each owns the property, together with the hand-over of tenant deposits the seller is holding. In an exchange they matter because every credit to the buyer is paid from sale proceeds and lowers what reaches your qualified intermediary. Reg. section 1.1031(k)-1(g)(7) names prorated rents and prorated taxes, but not security deposits, so deposits need separate handling.
At a glance
| Prorated rent | Named in the regulation as an item outside the amount realized |
|---|---|
| Prorated taxes | Named as a transactional item that may appear on the closing statement |
| Security deposits | Not named; settle them outside the exchange closing where you can |
| Who computes them | The settlement agent, under the contract and local closing practice |
The regulation names prorated rent and prorated taxes, and leaves deposits out.
Reg. section 1.1031(k)-1(g)(7) lists items whose receipt is disregarded when deciding whether an exchange safe harbor still applies. The first category is items a seller may receive as a consequence of the sale that are not included in the amount realized, with prorated rents as the example. The second is transactional items that relate to the sale or purchase and, under local standards, appear on typical closing statements as the buyer's or seller's responsibility: commissions, prorated taxes, recording or transfer taxes and title company fees.
Read together, rent you collected for days you owned the building is your rental income, not sale price, and a proration of taxes is a closing-statement item of the same kind as a commission. The regulation answers whether these items disturb the safe harbor. How they change boot and basis is a separate calculation on Form 8824, where exchange expenses reduce the cash figure on line 15.
Tenant security deposits are not on either list. They are money the tenants are owed back, and the buyer takes over that obligation. Why a deposit credit can cut exchange cash without cutting what you need to reinvest, and the cleaner way to move deposits, is set out in are security deposits and rent prorations boot.
A hypothetical closing shows where each proration lands.
Hypothetical figures: you sell a small apartment building for $2,000,000 and close mid-month. You collected $20,000 of rent for the month, so the buyer is credited about $10,000 for its days. Unpaid county taxes for the year to date of $15,000 are credited to the buyer, and $25,000 of tenant deposits are credited too.
Each credit is paid from the sale proceeds, so the intermediary receives $50,000 less than it otherwise would. The rent and tax credits fit the categories the regulation names. The $25,000 deposit credit is the one to move: if you pay the deposits to the buyer from your operating account, that $25,000 stays with the intermediary for the replacement purchase. Run your own numbers with your CPA.
It bites on the settlement statement, before anyone wires the money.
Prorations are set in the draft statement days before closing, which is the time to ask for changes. The settlement statement for a 1031 exchange walks through each line, and closing costs paid from exchange funds covers which other charges can come out of proceeds.
On the purchase side the same items run the other way: the replacement seller credits you for rent it collected for your days and you pay your share of taxes. A credit that lowers the cash needed from the intermediary can leave funds unspent, and money returned to you after the exchange is covered in leftover cash after a 1031 exchange.
Related questions
Is prorated rent credited to the buyer boot?
The regulation treats prorated rent as an item outside the amount realized and disregards it for the safe harbors, so it does not by itself taint the exchange. It does lower the cash reaching the intermediary, which you may need to replace with your own cash at the replacement closing.
Can my share of property taxes be paid from exchange proceeds?
Prorated taxes are one of the transactional items named in Reg. section 1.1031(k)-1(g)(7)(ii), alongside commissions and recording fees. Your CPA will still decide how they are reported on Form 8824.
Who calculates the prorations?
The settlement agent computes them from the purchase contract and local closing practice, which is why the regulation refers to items that appear 'under local standards' on typical closing statements.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.