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Acquisition Cost

In the 1031 exchange industry, Acquisition Cost refers to the total amount of capital required to take ownership of a replacement property. This cost typically includes the purchase price of the property itself along with any additional expenses necessary to acquire it, such as closing costs, advisory fees, legal fees, title insurance, and any other related expenses.

The concept of acquisition cost is particularly important in the context of a 1031 exchange, which is a strategy used by real estate investors to defer capital gains taxes on the sale of a property by using the proceeds to purchase a like-kind property. The Internal Revenue Service (IRS) in the United States governs these transactions under Section 1031 of the U.S. Internal Revenue Code.

To successfully complete a 1031 exchange, the acquisition cost of the replacement property must be equal to or greater than the net sales price of the relinquished property. If the acquisition cost is lower, the investor may not be able to defer all the capital gains taxes and could be liable for taxes on the difference, which is often referred to as boot.