How to Calculate a 1031 Exchange: Basis, Boot, and New Basis

To calculate a 1031 exchange, you work through four numbers in order: the adjusted basis of the property you sold, the realized gain on the sale, the recognized (taxable) gain caused by any boot, and the new basis of the replacement property. Get those four right and the rest of the return follows. Get the first one wrong and every downstream number is wrong with it.

The math is arithmetic. The traps are in which costs qualify, how debt is treated, and how depreciation carries forward.

What You Need Before You Run the Numbers

Pull these records for the relinquished property before you start:

Original purchase price from the closing statement (HUD-1 for older deals, Closing Disclosure for purchases after October 2015).
Capital improvement receipts — permanent structural additions, roof, HVAC, plumbing, anything that extended the property’s useful life. Routine repairs do not count.
Accumulated depreciation claimed over your ownership period, tracked on IRS Form 4562.¹
Selling expenses: brokerage commissions, escrow and title fees, attorney fees, recording fees, transfer taxes, and the qualified intermediary’s fee.

All of this feeds IRS Form 8824.² The IRS charges interest on underpayments at rates that have run at 7 percent through the first quarter of 2026, so accuracy is worth the time.³

Step 1: Adjusted Basis of the Property You Sold

Adjusted basis is your unrecovered investment at the moment of sale. The formula:

Original purchase price + capital improvements − accumulated depreciation = adjusted basis

Example: you bought a rental for $300,000, spent $40,000 on a new roof and HVAC, and claimed $80,000 in depreciation. Your adjusted basis is $260,000.

One detail catches people: you must subtract all depreciation you were entitled to claim, not just the depreciation you actually claimed. Skipping deductions in prior years does not give you a higher basis now. Routine maintenance and repairs never get added to basis, no matter what they cost.

Step 2: Realized Gain

Realized gain is the full profit built into the sale, whether or not you owe tax on it yet. Subtract adjusted basis from the net sale price:

Contract sale price − qualifying selling expenses = net sale price
Net sale price − adjusted basis = realized gain

Not every closing cost qualifies. Costs tied directly to selling the relinquished property reduce your sale price:

Brokerage commissions (typically 5 to 6 percent of the sale price)
Escrow and title fees
Attorney fees
Transfer taxes
Recording fees
Qualified intermediary fees

Costs associated with financing the replacement property — loan origination fees, lender prorations — do not reduce the sale side. They belong on the purchase side of the transaction.

Using the earlier numbers: sale price $500,000, qualifying selling expenses $32,000, net sale price $468,000. Subtract the $260,000 adjusted basis and realized gain is $208,000. In a straight sale you would owe capital gains tax on all of it. A 1031 exchange defers that tax by rolling it into the replacement property.⁴

Step 3: Recognized Gain and Boot

Realized gain is the total profit; recognized gain is the piece that’s taxable right now. In a fully structured exchange where you reinvest everything, recognized gain is zero. The moment you pull cash out or drop your debt load, part of the gain becomes taxable.

That taxable piece comes from “boot” — any non-like-kind value you receive. Recognized gain is always the lesser of the total boot received or the total realized gain.⁴ Boot comes in two forms.

Cash Boot

Any sale proceeds you keep instead of reinvesting are cash boot. Pocket $30,000 out of a $500,000 sale and you have $30,000 in cash boot, taxable up to the amount of your realized gain.

Mortgage Boot

Mortgage boot appears when the replacement property carries less debt than the relinquished one. Debt relief is treated as money received.⁵ Old mortgage $250,000, new mortgage $200,000, mortgage boot $50,000.

The netting works in your favor. You can offset mortgage boot by contributing additional cash into the deal. Add $50,000 of your own cash to that same replacement purchase and the extra cash cancels the $50,000 in debt relief, leaving zero net boot. The IRS wants to see your full equity position reinvested; whether that equity comes as cash or debt does not matter, as long as the total value of the replacement property equals or exceeds the relinquished one.

Two conditions eliminate recognized gain entirely: the replacement property must be worth at least as much as the property sold, and all net sale proceeds must flow through the qualified intermediary into the replacement.

Step 4: New Basis of the Replacement Property

New basis is the tax starting point for the replacement, and it is almost never the purchase price. Section 1031 sets basis at the same basis you had in the old property, decreased by any money received and increased by any gain recognized.⁶

The easier working formula:

Replacement purchase price − deferred gain = new basis
where deferred gain = realized gain − recognized gain.

In a fully deferred exchange, deferred gain equals realized gain, and your new basis will be lower than the purchase price by exactly that amount. That lower basis is how the deferred tax is preserved. When you eventually sell in a taxable transaction, the reduced basis produces a larger gain, capturing profit from both the original and the replacement property. Chain multiple exchanges and the basis keeps shrinking while the embedded deferred gain keeps growing.

How Depreciation Splits on the New Property

Your new basis has two parts for depreciation. The “exchanged basis” is the piece carried over from the relinquished property. You keep depreciating it over the remaining recovery period of the old property, using the same method. If 12 years remained on a 27.5-year residential schedule, those 12 years continue.

The “excess basis” is any additional value from trading up. It gets its own fresh depreciation schedule — 27.5 years for residential rental, 39 years for commercial. You can instead elect to treat the whole replacement as a single new asset with one new schedule, but the election has to be made on Form 4562 with the timely filed return for the year you receive the replacement property.¹

A Full Worked Example

You own a rental duplex purchased for $350,000. You invested $50,000 in capital improvements and claimed $90,000 in depreciation. You sell for $600,000, paying $36,000 in brokerage commissions and $9,000 in other qualified exchange expenses.

Step 1. Adjusted basis: $350,000 + $50,000 − $90,000 = $310,000.

Step 2. Realized gain: $600,000 − $45,000 selling expenses = $555,000 net sale price. Then $555,000 − $310,000 = $245,000 realized gain.

You use the full exchange proceeds to buy a small apartment building for $750,000. Old mortgage was $180,000; new mortgage is $300,000. All cash proceeds flow through the qualified intermediary; the new loan funds the rest.

Step 3. Boot and recognized gain: no cash pulled out (zero cash boot). New mortgage exceeds old mortgage, so no debt relief (zero mortgage boot). Recognized gain: $0.

Step 4. New basis: deferred gain = $245,000 − $0 = $245,000. New basis = $750,000 − $245,000 = $505,000.

The apartment building goes on your books at $505,000 even though you paid $750,000. That $245,000 gap is the deferred tax from the duplex sale. When you eventually sell without another exchange, you owe tax on both the apartment building’s own appreciation and the $245,000 that rode along.

Tax Rates When You Do Recognize Gain

If boot produces recognized gain, or if you eventually sell without another exchange, three layers of federal tax can apply.

Long-term capital gains at 0, 15, or 20 percent depending on income. For 2026, the 20 percent rate begins above $545,500 for single filers and $613,700 for married couples filing jointly.
Depreciation recapture — the portion of gain attributable to depreciation you claimed — taxed at a maximum 25 percent rate, not at the lower capital gains rates. This is the “unrecaptured Section 1250 gain.”⁷
Net investment income tax of 3.8 percent on net investment income when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).⁸

Stacked together, a high-income investor selling outside an exchange can face a federal rate above 30 percent on the recapture portion alone. That is the number every 1031 calculation is measured against.

Reporting the Numbers on Form 8824

Every 1031 exchange gets reported on IRS Form 8824, filed with the return for the year the relinquished property was transferred.⁹ Part I covers the property descriptions and dates. Part II applies only to related-party exchanges. Part III is where the math lives — realized gain, recognized gain, deferred gain, and your basis in the replacement on Line 25.

Related-party exchanges carry an extra rule: both sides must hold their property for at least two years after the exchange, or the deferral is retroactively disqualified and all deferred gain becomes taxable in the year of the original exchange.¹⁰

Threshold Rules That Can Undo the Calculation

The math above assumes a valid exchange. A few boundary rules can wipe out the deferral no matter how clean your numbers are.

Only real property held for business or investment qualifies; the Tax Cuts and Jobs Act ended 1031 treatment for personal property, equipment, and intangibles beginning in 2018.¹¹ U.S. real property is not like-kind to foreign real property. A primary residence does not qualify unless first converted to investment use, and fix-and-flip inventory never qualifies.

Two deadlines govern the deferral: you must identify replacement properties within 45 days of transferring the relinquished property, and you must close within the earlier of 180 days or the due date of your tax return, including extensions, for the year of the sale.⁴ Miss either one and the exchange collapses back into a taxable sale.

You also cannot touch the sale proceeds. Actual or constructive receipt of the funds before closing on the replacement turns the transaction into a sale. A qualified intermediary — an unrelated third party who is not your accountant, attorney, agent, or anyone who has served as your employee or agent within the previous two years — has to hold the money under a written exchange agreement restricting your access.¹²

Clear those thresholds and the four-step calculation is what you file.

1
Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization
2
Internal Revenue Service. About Form 8824, Like-Kind Exchanges
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Internal Revenue Service. Quarterly Interest Rates
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment – Subsection (d)
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Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. Topic No. 559, Net Investment Income Tax
9
Internal Revenue Service. Instructions for Form 8824 (2025)
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment – Subsection (f)
11
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
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Internal Revenue Service. Treatment of Deferred Exchanges (Referencing 26 CFR 1.1031(k)-1)