The short answer
Added to basis, not deducted. Qualified intermediary fees, broker commissions, title and escrow charges and transfer taxes are not deductible in the year of the exchange, and they are not lost either: Form 8824 gives them two jobs in a fixed order. Line 15 subtracts them from the cash and net debt relief you received, which can shrink or erase your taxable boot, and line 18 carries whatever is left into the basis of the replacement property, where you recover it through depreciation and through a smaller gain when you finally sell for cash. Loan-related charges are the one group that behaves differently, because they follow the mortgage rather than the exchange.
At a glance
| Form 8824, line 15 | Cash and net debt relief, reduced (not below zero) by exchange expenses you incurred |
|---|---|
| Form 8824, line 18 | Basis given up, net amounts paid to other party, plus expenses not used on line 15 |
| Form 8824, line 25 | Replacement basis equals lines 18 and 23 added together, less line 15 |
| Current deduction | None. There is no Schedule E line for the intermediary fee or the sales commission |
| Costs the regulation names | Commissions, prorated taxes, recording or transfer taxes, title company fees |
| Points on the new loan | Deducted over the term of the loan, not in the year paid |
| Reverse exchange | Accommodation titleholder fees under the Rev. Proc. 2000-37 arrangement capitalize too |
Line 15 absorbs the boot first, then line 18 carries the remainder into basis
Form 8824 names exchange expenses twice, and the order decides your tax. Line 15 reads: cash received, fair market value of other property received, plus net liabilities assumed by the other party, "reduced (but not below zero) by any exchange expenses you incurred."
Line 18 then picks up whatever is left: "Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any exchange expenses not used on line 15." Line 25 sets the replacement property's basis as the sum of lines 18 and 23, reduced by line 15.
So every dollar of exchange cost does exactly one of two things. It kills a dollar of otherwise taxable boot, or it adds a dollar of basis. It never becomes a deduction on this year's return.
A hypothetical: $69,200 of costs swallowing $40,000 of cash taken at closing
Take a hypothetical sale carrying a $60,000 sales commission, $8,000 of title and escrow charges and a $1,200 intermediary fee, so $69,200 in all, and assume you instructed the closing agent to release $40,000 of cash to you while your old and new mortgages happened to match.
Line 15 starts at $40,000 and is reduced by the $69,200, floored at zero, so line 15 is $0. Line 20 is capped by line 15, so nothing is recognized: the costs ate the cash before the cash could be taxed.
The unused $29,200 moves to line 18 and, through line 25, lifts the replacement property's basis by that amount. Had you taken no cash at all, the entire $69,200 would have gone into basis. Have your tax preparer run the arithmetic on your own settlement statements before the return goes out, and see What is boot in a 1031 exchange? for the wider picture.
Nothing here is an operating expense, which is why Schedule E has no room for it
Costs of selling reduce what you realized on the disposition; costs of buying are capitalized into what you bought. Neither is an ordinary expense of running a rental, so neither belongs among your repairs, insurance and management fees.
Publication 527 lists the settlement charges that join basis on a purchase: abstract fees, legal fees, recording fees, surveys, transfer taxes and title insurance. The same categories on the sale side reduce the amount realized instead of producing a write-off.
The consequence is a slow recovery. An addition to the basis of a commercial replacement comes back over 39 years of depreciation on the building portion, or in a single stroke at the day you finally sell the replacement for cash.
The charges Treasury actually calls transactional items
Treas. Reg. 1.1031(k)-1(g)(7)(ii) describes "transactional items that relate to the disposition of the relinquished property or to the acquisition of the replacement property and appear under local standards in the typical closing statements as the responsibility of a buyer or seller," and gives commissions, prorated taxes, recording or transfer taxes and title company fees as its examples.
That paragraph is answering a different question from this page. It tells you what an intermediary may pay out of exchange funds without breaking the safe harbor; it does not tell you how the cost is reported. For the payment side, read Which closing costs can be paid from exchange funds without creating boot?.
- Sales and brokerage commissions on the relinquished and the replacement closings
- Escrow, settlement and title company fees, and title insurance premiums
- Recording fees, documentary stamps and state or county transfer taxes
- The intermediary's exchange fee and its per-property charges on a multi-property file
- Legal fees for drafting the exchange documents and the deed
Loan charges follow the mortgage: points amortize, origination costs capitalize
Points and loan origination fees on the replacement property's mortgage are prepaid interest. Publication 527 says you "generally can't deduct the full amount in the year paid, but must deduct the interest over the term of the loan."
The other charges you pay to obtain that mortgage behave differently again. Publication 527 treats mortgage commissions, abstract fees and recording fees incurred to get the loan as "capital expenses that are part of your basis in the property."
If the loan ends early through a refinance or a sale, Publication 527 allows any remaining unamortized points to be deducted in the year the loan ends. Whether exchange money may pay those charges in the first place is settled at Do loan fees, points and rate buy-downs paid from exchange funds count as boot?.
Reverse, improvement and DST costs: the same treatment, different paperwork
Park a replacement property first and a further party joins the deal: the exchange accommodation titleholder named in the qualified exchange accommodation arrangement of Rev. Proc. 2000-37. Its fee, the single-purpose entity's formation cost, carrying charges and the extra legal work are all costs of acquiring the replacement, so they capitalize; Reverse 1031 exchanges covers what that adds up to.
Construction draws inside an improvement exchange are a different animal. That money buys improvements, which become depreciable basis of their own rather than exchange expense, as Improvement and build-to-suit exchanges explains.
When the replacement is a DST beneficial interest, the sponsor's load is embedded in the offering price rather than itemized on a settlement statement as a charge to you, so it does not show up on your Form 8824 the way a commission does. What it does to the dollars actually reaching the real estate is the subject of DST fees and loads.
Related questions
Can I deduct the intermediary's fee on Schedule E as a rental expense?
No. It is a cost of disposing of one property and acquiring another, not a cost of operating either one, so it runs through Form 8824 lines 15 and 18 instead.
My exchange failed. Can I write off the fees I already paid?
The sale becomes a taxable disposition and its selling costs reduce the amount realized in the ordinary way; ask your CPA how to treat the intermediary's fee on a file that never completed. When does the QI release my money if my exchange fails? covers the timing side.
Do exchange expenses increase the part of my basis that I can depreciate?
Only the share allocated to improvements. Split the addition between land and building the same way you split the purchase price, because land basis never depreciates; see How is the replacement property depreciated after a 1031 exchange?.
Is there a line on Form 8824 that shows my exchange expenses separately?
No, they sit inside lines 15 and 18 with no schedule of their own. Keep both settlement statements and the intermediary's invoice permanently; How likely is an IRS audit of my 1031 exchange? lists the rest of the file.
Are prorated rents and security deposits exchange expenses?
No. The regulation treats prorated rents as something a seller receives that is not part of the amount realized, and a deposit is the tenant's money; Are tenant security deposits and rent prorations boot? sorts them out.
Sources
Checked against these publications on September 19, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- IRS Form 8824, Like-Kind Exchanges (2025) — lines 15, 18, 20 and 25
- IRS Instructions for Form 8824 (exchange expenses on lines 15 and 18)
- 26 CFR section 1.1031(k)-1(g)(7) — transactional items and prorated rents
- IRS Publication 527, Residential Rental Property — points, mortgage expenses and settlement costs
- Rev. Proc. 2000-37 — qualified exchange accommodation arrangements and the exchange accommodation titleholder
- IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Section 1031 (basis carryover)
