A like-kind exchange journal entry removes the relinquished property at its original cost, clears its accumulated depreciation, debits the replacement property at its calculated tax basis (not fair market value), and records any cash paid or received and any recognized gain on separate lines. Under Section 1031 of the Internal Revenue Code, this treatment applies only to real property held for business or investment; since the Tax Cuts and Jobs Act took effect in 2018, equipment, vehicles, artwork, and other personal property no longer qualify. The deferred gain is never recorded in its own account. It lives in the gap between the replacement property’s recorded basis and its fair market value, and it comes out of hiding when that property is eventually sold.
The Four Numbers You Need Before Posting Anything
Every like-kind exchange entry is built from four figures. Get these right and the debits and credits fall into place.
The adjusted basis of the relinquished property is its original cost minus accumulated depreciation and any other downward adjustments. This is the starting point for every gain calculation.
The realized gain is the total economic profit on the swap: fair market value of everything you receive (including cash and debt relief) minus your adjusted basis. It tells you the full profit, not the taxable portion.
The recognized gain is the portion taxable right now. In a clean exchange with no boot, it is zero. When you receive boot (cash, debt relief, or non-like-kind property), recognized gain equals the lesser of the realized gain or the boot received. Whatever realized gain is not recognized gets deferred, not forgiven.
The basis of the replacement property follows Section 1031(d): adjusted basis of the relinquished property, plus any boot paid and any recognized gain, minus any boot received. The result sits below the replacement property’s fair market value by exactly the amount of deferred gain. That gap is the deferred tax liability, carried without a separate ledger account.
Straight Swap With No Boot
The simplest case: both properties carry the same fair market value and no cash or other property changes hands. Assume these facts for Property A exchanged for Property B:
- Property A original cost: $500,000
- Accumulated depreciation on Property A: $200,000
- Adjusted basis of Property A: $300,000
- Fair market value of Property A: $600,000
- Fair market value of Property B: $600,000
Realized gain is $300,000 ($600,000 received minus $300,000 adjusted basis). No boot was received, so recognized gain is zero and the full $300,000 is deferred. Property B’s basis is the $300,000 carryover.
| Account | Debit | Credit |
|---|---|---|
| Replacement Asset (Property B) | $300,000 | |
| Accumulated Depreciation—Property A | $200,000 | |
| Property A Asset Account | $500,000 |
Debits and credits each total $500,000. No deferred gain line appears. The $300,000 difference between Property B’s $600,000 fair market value and its $300,000 recorded basis is where the deferral lives, and it will surface as taxable gain when Property B is sold.
Boot Received: Cash on Top of the Replacement Property
When you take cash or non-like-kind property on top of the replacement asset, that extra value is boot and triggers immediate taxable gain. Keep the same Property A facts. This time you receive Replacement Property C with a fair market value of $500,000 plus $100,000 cash.
Realized gain is still $300,000 ($500,000 Property C plus $100,000 cash, minus $300,000 adjusted basis). Recognized gain is the lesser of the $300,000 realized gain or the $100,000 boot, so $100,000 is taxable now and $200,000 is deferred. Property C’s basis works out to $300,000: $300,000 old basis, plus $100,000 recognized gain, minus $100,000 boot received. The recognized gain and boot cancel in this scenario, but the formula still has to be run.
| Account | Debit | Credit |
|---|---|---|
| Cash (Boot Received) | $100,000 | |
| Replacement Asset (Property C) | $300,000 | |
| Accumulated Depreciation—Property A | $200,000 | |
| Property A Asset Account | $500,000 | |
| Gain on Exchange (Taxable) | $100,000 |
Debits and credits each total $600,000. The $100,000 gain hits the income statement and the current-year tax return. The $200,000 deferred portion is captured by Property C sitting on the books at $300,000 rather than its $500,000 market value.
Boot Paid: Cash Out to Acquire a Higher-Value Property
Paying boot runs in the opposite direction. You add cash to acquire a more valuable replacement property, and that extra investment generally does not trigger any recognized gain because you have not received anything beyond like-kind property.
Same Property A facts. You acquire Replacement Property D with a fair market value of $700,000 and pay $100,000 cash to cover the difference.
Realized gain is $300,000. No boot received, so recognized gain is zero and the full $300,000 is deferred. Property D’s basis is $400,000: the $300,000 old basis plus the $100,000 boot paid. The cash payment increases the replacement property’s basis directly because it represents additional investment.
| Account | Debit | Credit |
|---|---|---|
| Replacement Asset (Property D) | $400,000 | |
| Accumulated Depreciation—Property A | $200,000 | |
| Property A Asset Account | $500,000 | |
| Cash (Boot Paid) | $100,000 |
Debits and credits each total $600,000. No taxable gain line appears. Property D’s $700,000 fair market value sits $300,000 above its $400,000 recorded basis, carrying the full deferral forward.
When Mortgage Debt Relief Acts Like Cash
Cash is not the only form of boot. When the buyer of your relinquished property assumes your mortgage, that debt relief is treated the same as receiving cash. No money hits your bank account, but recognized gain can still result.
Suppose the relinquished property carries a $200,000 mortgage the buyer assumes, and you take on a $100,000 mortgage on the replacement. Net debt relief is $100,000, and it functions as boot received, calculated into recognized gain the same way as cash boot.
You can offset debt relief by putting cash into the deal. An extra $100,000 of cash paid would cancel the $100,000 of mortgage boot received, leaving zero net boot and zero recognized gain. Shedding debt without offsetting it with cash or a larger replacement mortgage is one of the most common ways an exchange accidentally produces a tax bill.
In the journal entry, net debt relief sits on the debit side as if cash had come in, and the replacement property’s basis is reduced accordingly. Net debt assumed (taking on more debt than you shed) works like boot paid, increasing the basis of the replacement property.
Book vs. Tax Treatment
Everything above reflects tax accounting. Financial reporting under GAAP can look different. Under ASC 845, a nonmonetary exchange with commercial substance (meaning the company’s future cash flows change meaningfully) is measured at fair value, and the full gain is recognized on the income statement immediately. Only exchanges that lack commercial substance get carried-over-basis treatment under GAAP.
Most real estate swaps between unrelated parties have commercial substance, so your GAAP books may show the replacement property at fair market value with a recognized gain while your tax records show a lower basis with deferred gain. The gap becomes a temporary timing difference tracked as a deferred tax liability until the replacement property is sold.
Depreciating the Basis You Just Recorded
The replacement property’s calculated basis is also the starting point for depreciation. Because that basis is lower than fair market value, annual depreciation deductions will be smaller than they would have been on an outright purchase. That reduced depreciation is part of how the deferred gain is eventually collected.
For tax purposes, the basis often has to be split, sometimes called bifurcated depreciation. The exchanged (carryover) basis continues to be depreciated over the remaining recovery period of the old property, using the same method and convention that applied to the relinquished asset. Any excess basis from boot paid or recognized gain is treated as newly placed-in-service property and depreciated under the current recovery period, method, and convention. Each piece is calculated separately.
An election under Treasury Regulation 1.168(i)-6(i)(2) lets you treat the entire basis as newly placed in service, which puts everything on one depreciation schedule. The election applies per exchange and covers both the relinquished and replacement property, so weigh the simpler bookkeeping against the change in depreciation timing before making it.
One structural reminder before you post anything: the entries above assume the exchange itself qualifies under Section 1031, which depends on the 45-day identification period, the 180-day closing deadline, and use of a qualified intermediary. If the transaction fails those requirements, it is a sale, not an exchange, and none of this journal entry treatment applies.