A 1031 Exchange offers investment property owners a valuable opportunity to defer capital gains taxes by reinvesting sale proceeds into like-kind replacement property.
While most investors focus on the big picture — such as tax deferral and reinvestment strategy — it's just as important to understand how transactional expenses factor into your exchange.
One of the most common questions we hear at Realized® is: Can I deduct the costs associated with a 1031 Exchange?
The answer is that some expenses can reduce your recognized gain, while others may not be deductible at all. Understanding the difference can impact both your tax liability and your future planning.
Which Expenses Can Offset Taxable Gain?
The IRS allows particular closing and transaction-related expenses to be netted against the proceeds of your relinquished property, effectively lowering your recognized gain. These costs aren't "deducted" traditionally but instead treated as exchange-related in your gain calculation.
Common examples include:
Incorporating these costs into your exchange calculation reduces the taxable "boot" you may owe and supports full or partial tax deferral, depending on your reinvestment amount and structure.
Not all costs in a 1031 Exchange reduce your gain or qualify as deductions. Some expenses are considered capitalized costs or operating expenses, while others fall outside the scope of exchange-related rules.
Examples of non-deductible or non-deferrable costs include:
These costs may have other tax treatments (such as being added to your basis or amortized), but they won't help you defer gain in the exchange itself.
In some cases, you may be able to deduct specific fees — not as part of your exchange, but as ordinary business expenses. For instance:
These would typically be claimed on your Schedule E (for rental property) or Schedule C (if you're a real estate professional) and should be reviewed with your CPA.
Every 1031 Exchange involves tax and transactional factors that can vary based on the investor’s circumstances. At Realized®, we help investment property owners:
We believe your investment property wealth deserves the same strategic attention as stocks, bonds, or mutual funds — including clarity around costs.
Planning a 1031 Exchange?
Connect with Realized® to learn how experienced guidance may support a compliant, tax-aware exchange approach tailored to your individual goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.