Hi Community. I am quite knowledgeable about taxes, but haven't been able to find a clear answer to my question. Even my accountant doesn't know for sure. We sold a rental property in 2022 for a capital gain. As with any standard sale, we incurred closing cost, which were approximately $50,000, and include standard closing cost items like interest, real estate taxes, transfer tax, agent commission, title fees, etc. I am aware of the rules for which closing costs are capitalized and which are deductible when you purchase a rental property. See, e.g., https://www.irs.gov/faqs/sale-or-trade-of-business-depreciation-rentals/rental-expenses/rental-expen....
However, we sold our property in a 1031 exchange, where the taxable capital gain is deferred. Thus, I want to deduct the closing costs against our rental income rather than apply against the sales proceeds since I do not care that my gain on the sale will be higher since it is a 1031 exchange. In other words, I am willing to accept a capital gain that is $50k higher since 1031 exchange, but want to deduct the $50k in closing costs against taxable rental income. Is that allowed?
