In a 1031 Exchange, Are Closing Costs Backed Out of the Seller’s Taxable Gain?

If one were to hypothetically sell a property for $1M with 6% commissions and closing costs (or $60k) and it has a current tax basis of $800k, would the seller’s taxable gain be $200k or $140k? In other words, are commissions and closing costs backed out of the seller’s post sale taxable gain?

This is an excellent question that comes up a lot in 1031 exchanges. Certain transactional expenses reduce the “amount realized” on the sale or exchange of real property.

3 General Rules of Thumb

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain.

  1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

  2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

  3. And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks. Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

For more information on this topic, check out this article.

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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Defer the tax. MAXIMIZE your gain.