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What Closing Costs Can Be Considered Acceptable 1031 Exchange Expenses?

Published on: May 30, 2022

What 1031 Exchange Costs Can Be Deducted?

A frequently asked question is “What expenses can be deducted from the 1031 exchange proceeds without resulting in a tax consequence?” Although the IRS has not published a complete list of qualifying expenses, there are some rulings that provide general parameters. Brokerage commissions can be deducted from the exchange proceeds (Revenue Ruling 72-456). Other transactional costs may also be able to be deducted if they are paid in connection with the exchange (Letter Ruling 8328011).

What Are Considered 1031 Exchange Expenses?

Transactional costs that are referred to as “exchange expenses” on Form 8824 are not specifically listed but should generally include costs that are:

A. A direct cost of selling real property, which typically includes:

  • Real estate commissions
  • Title insurance premiums
  • Closing or escrow fees
  • Legal fees
  • Transfer taxes
  • Notary fees
  • Recording fees

B. Costs specifically related to the fact the transaction is an exchange such as the Qualified Intermediary fees.

Items That Are Not Considered 1031 Exchange Expenses

Although not a complete list, the costs related to obtaining the loan should not be deducted from the proceeds. These “non-exchange expenses” include:

  • Mortgage points and assumption fees
  • Credit reports
  • Lender’s title insurance
  • Prorates mortgage insurance
  • Loan fees and loan application fees

Other “non-exchange expenses” can include:

  • Property taxes
  • Utility charges
  • Association fees
  • Hazard insurance
  • Credits for lease deposits
  • Prepaid rent and security deposits

These rough guidelines do not address every potential cost. Exchangers should review their specific transaction and closing costs with their tax and/or legal advisors.

Authored By:

1031 Exchange Advisor

Nicholas has been a dynamic figure in the 1031 exchange industry since 2007. With over two decades of experience in marketing and web development, Nicholas has demonstrated his entrepreneurial spirit by owning an INC 500 company and maintaining a multi-year presence in the INC 5000 list. He is renowned for his dedication and passion for his work. Outside of his professional endeavors, Nicholas is a devoted father to two teenage boys. Together, they share a love for mountain biking and exploring the outdoors on their ATVs every weekend. Nicholas’s commitment to excellence is evident in both his career and personal life.