How to Calculate 1031 Exchange Basis

A Guide to How to Calculate 1031 Exchange Basis

The basis of replacement property received in a Section 1031 exchange generally reflects the tax basis carried through from the relinquished property, adjusted for relevant money or other property transferred or received, gain recognised in the exchange, liabilities, exchange-related amounts and other applicable adjustments.

This carried-over basis is one of the mechanisms that preserves deferred gain rather than eliminating it. That is why correctly determining the replacement property’s basis matters both immediately after the exchange and when the property is later depreciated, sold or exchanged again.

For the broader rules governing eligibility, timing and completing the transaction, see our Section 1031 Exchange guide.

What Is Basis in a 1031 Exchange?

Basis is the tax value assigned to property for purposes such as calculating gain or loss and determining allowable depreciation.

In a 1031 exchange, the replacement property’s basis is not necessarily the same as its purchase price or fair market value because some or all of the gain from the relinquished property may have been deferred and carried into the replacement property.

Understanding this distinction is fundamental to understanding what tax deferral actually means. A successful 1031 exchange generally postpones recognition of qualifying gain. It does not simply erase the underlying tax attributes associated with that gain.

How Is Replacement Property Basis Calculated?

In a qualifying 1031 exchange, the replacement property’s tax basis is generally not reset to its purchase price or fair market value. Instead, the basis of the relinquished property carries into the replacement property, subject to adjustments for amounts such as money received, liabilities, recognised gain or loss, exchange costs and other applicable items.

One simple way to understand the principle is:

Replacement property cost
− gain deferred
= replacement property basis

This is a conceptual shortcut, not a universal formula for completing Form 8824. It is useful because it shows why the replacement property’s value and tax basis can be different. The difference effectively preserves the gain that was deferred through the exchange rather than treating that gain as though it had disappeared.

A more technical carryover-basis calculation starts with the adjusted basis of the relinquished property and then applies the relevant increases and decreases required by the exchange. Under the framework described in IRS Publication 551, these can include:

Adjusted basis of like-kind property given up
− money received
− liabilities assumed by the other party or paid off in a deferred exchange
− recognised loss on non-like-kind property, where applicable
+ additional exchange costs incurred
+ liabilities assumed or new debt on property received
+ recognised gain
± other applicable adjustments
= basis carried into the qualifying replacement property

This should not be treated as a universal calculator for every 1031 exchange. Multiple properties, non-like-kind property, Section 121 exclusions, depreciation-related issues and other circumstances can make the calculation more complex.

The Form 8824 Basis Calculation

The basis calculation connects directly to how a 1031 exchange is reported for federal tax purposes.

Current Form 8824, Like-Kind Exchanges, calculates the basis of the like-kind property received on line 25. The Form 8824 instructions state that the amount entered on line 25 is the taxpayer’s basis in the like-kind property received in the exchange.

Form 8824 therefore does not simply ask what the investor paid for the replacement property. Its calculation reflects the economics and tax treatment of the exchange, including deferred and recognised gain and other relevant amounts.

The purchase price of replacement property and its tax basis can be different after a 1031 exchange because deferred gain is preserved through the basis calculation.

For the actual filing process and how the transaction flows through the tax return, see How to Report a 1031 Exchange.

1031 Exchange Basis Example

Consider a deliberately simple exchange:

• Relinquished property fair market value: $600,000
• Adjusted tax basis: $300,000
• Replacement property acquired: $750,000
• Additional cash paid: $150,000
• No boot received
• No liabilities
• No recognised gain
• Exchange expenses ignored for this simplified example

The realised gain on the relinquished property is:

$600,000 − $300,000 = $300,000 realised gain

Assuming all requirements for full Section 1031 deferral are satisfied, that $300,000 gain is deferred.

Cost-Minus-Deferred-Gain View

Using the conceptual shortcut:

$750,000 replacement property
− $300,000 deferred gain
= $450,000 replacement-property basis

Carryover-Basis View

The same transaction can be understood from the carryover-basis perspective:

$300,000 adjusted basis of relinquished property
+ $150,000 additional cash paid
= $450,000 replacement-property basis

Both methods produce the same result.

The investor now owns property worth $750,000, but does not have a $750,000 tax basis in that property. The difference reflects the gain that remains deferred.

This treatment is consistent with IRS Publication 551, which states that where a taxpayer exchanges qualifying like-kind property and also pays money, the basis of the property received is generally the basis of the property given up plus the money paid.

This is a simplified illustration. Liabilities, boot, recognised gain, exchange expenses, multiple properties and other circumstances can change the calculation.

How Does Boot Affect Replacement Property Basis?

Boot can affect the replacement property’s basis, but its effect should not be reduced to a rule that “boot always reduces basis dollar-for-dollar.”

Money received, non-like-kind property and liabilities can alter the basis calculation. At the same time, gain recognised as part of the exchange can increase the basis carried into the like-kind replacement property. Non-like-kind property received also has its own basis treatment and may require basis to be allocated between the properties received.

How Do Exchange Expenses Affect Basis?

Not every cost appearing on a 1031 closing statement is treated the same way for basis purposes.

IRS Publication 551 identifies exchange expenses associated with replacement property, including items such as brokerage commissions, attorney fees and deed-preparation fees. Where qualifying costs are incurred as part of acquiring the replacement property, the IRS guidance provides for those costs to be added to the basis of the like-kind property received in the circumstances described.

Costs associated with disposing of the relinquished property can also be exchange expenses, but their treatment can affect other parts of the exchange calculation rather than simply being added wholesale to replacement-property basis.

Other amounts appearing on a settlement statement are not automatically exchange expenses. Items such as property taxes, rent prorations, security deposits and repairs should not simply be added to replacement-property basis merely because they appear on the closing statement.

What Happens to Depreciation After a 1031 Exchange?

A 1031 exchange does not generally give the replacement property a completely fresh tax basis equal to its purchase price. Because the replacement property’s basis reflects the exchange calculation, that basis also matters when determining depreciation after the exchange.

Special depreciation rules can apply to property acquired through a like-kind exchange. Depending on the property and circumstances, IRS rules may distinguish between carryover basis and excess basis, and specific exceptions or elections can affect the depreciation treatment.

IRS Publication 946 contains the detailed rules governing depreciation of property acquired in a like-kind exchange. Those rules can vary depending on the type of property and the circumstances of the transaction, so the depreciation treatment should not be reduced to a single rule based solely on the final replacement-property basis.

An investor should not simply assume that depreciation always restarts as though the entire replacement property had been acquired in a completely new taxable transaction.

What Happens to Basis in a Later Sale or Another 1031 Exchange?

The deferred gain has not been erased merely because it was not recognised in the exchange year.

When the replacement property is later sold or otherwise disposed of in a taxable transaction, its adjusted basis is used in determining the resulting gain or loss. At a high level:

Amount realised on later disposition
− adjusted basis
= gain or loss calculation

The replacement property’s basis can also change while it is held. Depreciation deductions, for example, generally reduce adjusted basis over time. Improvements and certain other capital expenditures can increase it.

The result is that determining replacement-property basis correctly at the time of the 1031 exchange creates the starting point for tax calculations that may matter years later.

If the replacement property instead becomes the relinquished property in another qualifying Section 1031 exchange, its then-current adjusted basis becomes part of the basis calculation for that next transaction.

The basis is therefore not reset merely because another exchange takes place.

Successive 1031 exchanges can continue tax deferral, but they do not reset the property’s tax history. The adjusted basis carried into each transaction remains important to the next exchange calculation.

Common 1031 Basis Mistakes

Using the Replacement Property’s Purchase Price as Its Tax Basis

The amount paid for replacement property is not automatically its tax basis after a 1031 exchange. Deferred gain and other adjustments involved in the exchange can result in a tax basis substantially below the property’s purchase price or fair market value.

Using the Relinquished Property’s Original Purchase Price

The carryover calculation starts with the property’s adjusted basis, not simply what the investor originally paid for it. Basis may have changed substantially during the period the relinquished property was owned.

Forgetting Prior Depreciation and Other Basis Adjustments

Depreciation generally reduces adjusted basis, while certain capital improvements and other qualifying expenditures can increase it. Ignoring those adjustments can produce the wrong starting basis before the exchange calculation even begins.

Assuming Deferred Gain Has Disappeared

A successful 1031 exchange can defer qualifying gain. It does not generally erase that gain. The carryover-basis rules are one of the ways the deferred tax consequences remain embedded in the replacement property.

Treating Every Closing Cost as a Basis-Increasing Exchange Expense

Not every amount appearing on a settlement statement receives the same basis treatment. Genuine exchange expenses must be distinguished from items such as property taxes, rent prorations, security deposits and repairs rather than automatically adding every closing-statement cost to replacement-property basis.

Ignoring Boot, Liabilities or Recognised Gain

Cash received, non-like-kind property, liabilities and recognised gain can all affect the basis calculation where applicable. A straightforward fully deferred exchange formula should not be applied to a transaction containing these additional elements without accounting for them.

Before Calculating Replacement-Property Basis

Have the relevant exchange records available, including:

• the relinquished property’s adjusted basis;
• its depreciation history and other prior basis adjustments;
• the closing statements for both the relinquished and replacement properties;
• details of any money or non-like-kind property received;
• the liabilities associated with both sides of the transaction;
• records of relevant exchange expenses; and
• Form 8824 and the underlying exchange records.

This is a practical starting checklist rather than an exhaustive list for every possible 1031 exchange.

FAQs

What Is the Basis of Replacement Property in a 1031 Exchange?

The replacement property’s basis is generally derived from the adjusted basis of the relinquished property, with applicable adjustments for items such as money received or paid, liabilities and recognised gain. The replacement property’s fair market value or purchase price does not automatically become its tax basis.

How Do I Calculate Replacement-Property Basis After a 1031 Exchange?

Start with the relinquished property’s adjusted basis and account for the applicable adjustments created by the exchange. For a simple fully deferred transaction, another useful conceptual view is replacement-property cost minus deferred gain. See the worked example above for both approaches.

Is Replacement-Property Basis the Same as Its Purchase Price?

Not automatically. A 1031 exchange can preserve deferred gain through the replacement property’s basis, meaning an investor may acquire property for one amount while having a lower tax basis in it.

Does Boot Affect Basis in a 1031 Exchange?

Yes, potentially. Money or non-like-kind property received, liabilities and any gain recognised can affect the basis calculation. The precise effect depends on the structure of the exchange. See 1031 Exchange Boot for the detailed treatment.

Do Closing Costs Increase 1031 Exchange Basis?

Some qualifying exchange or acquisition expenses can affect basis, but not every item appearing on a closing statement is treated the same way. The nature of the expense matters, so closing costs should not simply be added wholesale to replacement-property basis.

How Does Depreciation Affect 1031 Basis?

Depreciation previously claimed generally reduces the adjusted basis of the relinquished property entering the exchange. After the exchange, the replacement property’s resulting basis also matters for future depreciation, although special rules, exceptions or elections can affect how depreciation is calculated.

What Happens to Basis If I Do Another 1031 Exchange?

If the replacement property later becomes the relinquished property in another qualifying 1031 exchange, its then-current adjusted basis becomes relevant to that next transaction. The property’s tax history does not simply reset with each exchange.

Where Is Replacement-Property Basis Reported?

Form 8824 calculates the basis of the like-kind property received. Under the current Form 8824 instructions, line 25 reports that basis. See How to Report a 1031 Exchange for the broader reporting process.

Primary IRS Sources

• IRS Publication 551. Basis of Assets
• IRS Instructions for Form 8824
• IRS Publication 946. How To Depreciate Property

Last updated and IRS guidance verified: September 4, 2026