The Effects of Relinquishment Costs on a 1031 Exchange

The effects of relinquishment costs, aka closing costs associated with relinquishing owned real property in a 1031 exchange, are two. First, they decrease taxable boot received in the exchange - but not below zero. Second, costs that remain after reducing taxable boot to zero, if any, may be added to the basis of the relinquished property to reduce the calculated gain on the exchange. Therefore, relinquishment costs should be viewed and accounted for as an important benefit in a 1031 exchange to the extent they are able to reduce the taxes associated with boot received and capital gains.