In a 1031 exchange involving mutliple classes of assets I understand that you have to compare the FMV's of the properties surrendered and received in each general asset class and you must go up in value in each class to completely defer any gains.
If I incurred $1 million in closing costs as part of the exchange, would I reduce the FMV of my real property "surrendered" by $1 million to determine if there is any exchange group deficiency (which would obviously be to my advantage)?

in reality, there is little authority in the tax law as to how to treat the variety of expenses / closing costs which may be associated with the sale or purchase of an exchanged asset.An exchange of multiple asset property creates issues when trying to allocate the various assets into their proper like-kind categories using a property by property comparison. Another issue is the allocation of the deferred gain and basis or closing costs among the various exchanged assets. However, by utilizing a Multiple Asset Exchange structure, Exchangers can realize a greater benefit than if they had structured the transaction as separate exchanges for each various type of asset.Any number of properties may be identified, as long as the exchanger acquires replacement property whose aggregate fmv is at least 95% of the aggregate fmv of all identified properties. If you buy/echnge multiple assets for a lump sum, you need to allocate the closing costs you pay among the assets you receive. You need to make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets.So, it depends; for example, all closing costs directly related to the sale / purchase of property-ies such as commissions, title policy, escrow fees, and such, are treated ;1)on Sale of Business or Investment Property-ies deducted from the sales price in figuring the gain or loss on the sale. 2) On Purchase of Business or Investment Property-ies , the costs are added to the basis of the property-ies acquired and reduce gain on sale later.Other closing costs , i.e., points must be capitalized and written off straight-line over the life of the loan. If the property is Section 1225 investment land, the write off is treated as investment interest. If the property is Section 1231 business property such as rentals, the points are written off as interest expense on your rental property Sch E of 1040.some closing costs on the sale of business property such as rentals, in this case all expense and income items must be taken on Sch E. Examples are rental deposits allocations, insurance and tax prorations, prepaid rent allocations and the like.
Given the general rule that an Exchanger must transfer all equity in the Relinquished Property to the Replacement Property, the issue is whether payment of typical sale and purchase settlement expenses out of the Relinquished Property sale proceeds ,exchange fund, will result in taxable boot to the Exchanger;sale or purchase of real estate held for personal use or dealer property do not qualify for 1031 treatment. It is possible to deduct from your boot, if you receive it, the costs to market your 1031 Exchange property at the time of closing of sale;many tax-payers, real estate pros and investors , overlook the selling expenses as an offset against boot received. Factoring in this offset is critical when the exchange is originated and in the planning stages. Selling expenses paid in connection with a 1031 exchange are treated as cash boot paid and offsets any boot received. Selling expenses include brokerage commissions and other closing costs such as title policy fees, escrow fees, and recording fees. If you receive no cash or property boot in the exchange, but you have net mortgage relief, you may offset sales expenses paid against your net mortgage relief. However, even if the offset creates a loss, the Code bars any deduction. Prorations and closing costs may still affect the calculation of basis or gain, or may constitute boot to the Exchanger if they either are not offset, or are deemed to be not directly related to the sale or acquisition.


Because of these issues and the lack of clear guidance in the law, an Exchanger should always discuss treatment of closing costs with their tax advisor prior to the respective closing. a like-kind exchange is unfavorable in the case of a realized loss since none of the loss will be recognized regardless of boot received.