The IRS has not been clear on this issue and has never come out with a list of qualifying expenses. Based on various ruling we can piece together some general guidelines.

Real Estate 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).

Transactional costs that are referred to as “exchange expenses” on Form 8824 are not specifically listed but should include costs that are a direct result of selling real property, which typically include:

Real estate commissions, title insurance premiums, closing or escrow fees and legal fees, transfer taxes, notary fees, recording fees.

And then any indirect costs of an exchange, such as the Qualified Intermediary (QI) fees.

Non-exchange expenses might include:

• Mortgage points and assumption fees,
• Credit reports,
• Loan acquisition fees (such as points, mortgage insurance, application fees, lender’s title insurance,
• assumption fees,
• appraisal fees,
• hazardous waste/property inspections required by the lender)

   

• Other non-exchange expenses:

• Property taxes,
• Utility charges,
• Association fees,
• Hazard insurance,
• Prepaid rents and security deposits