A 1031 exchange basis worksheet walks you from your old property’s adjusted basis to the basis of the replacement property using a fixed formula: take the adjusted basis of what you gave up, subtract any cash or debt relief you received, and add any gain the IRS taxed on the exchange along with any additional cash, additional debt, or qualifying exchange expenses you put in. The result is the number you depreciate and the number that determines your gain the day you finally sell without exchanging again.
Everything on the worksheet depends on getting three inputs right: the adjusted basis of the relinquished property, the boot you received, and the exchange expenses you paid. Work through them in that order.
Step 1: Adjusted Basis of the Relinquished Property
Start with the original purchase price. Add acquisition costs directly tied to the purchase — title insurance, survey fees, transfer taxes, and legal fees for the acquisition itself. Loan-related costs are not part of basis. Mortgage points, loan origination fees, and lender-required appraisals are costs of obtaining financing, not costs of acquiring the property.
Add capital improvements made during your ownership. A new roof, a full HVAC replacement, or converting a garage into a rental unit qualifies because it adds value or extends the property’s useful life. Routine maintenance like repainting or patching drywall does not; those were deducted as operating expenses in the year you paid them.
Then subtract all depreciation you claimed — or should have claimed. The IRS uses MACRS, which depreciates residential rental property over 27.5 years and nonresidential real property over 39 years.1Internal Revenue Service. Publication 527 – Residential Rental Property The “should have taken” language is not decorative. Even if you skipped depreciation in some years, the IRS reduces your basis as though you had claimed it. Missed deductions do not preserve basis.
A quick illustration. You bought a rental property for $500,000, spent $50,000 on a new roof and windows, and claimed $100,000 in depreciation. Your adjusted basis is $500,000 + $50,000 − $100,000 = $450,000. That is the number you carry into the exchange calculation.
Step 2: Identify the Boot You Received
Boot is any value you pulled out of the exchange rather than reinvesting. It comes in two main forms, and it triggers tax on part of your gain.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
Recognized gain — the taxable slice — is always the lesser of your total realized gain or your total boot. Realized gain of $200,000 with $30,000 in boot means you are taxed on $30,000. Boot of $250,000 with realized gain of $200,000 means you are taxed on $200,000.3Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
Cash Boot
Cash boot is money left over that the qualified intermediary sends back to you instead of applying to the replacement property. Sell for $500,000, spend $460,000 on the replacement, and the $40,000 that comes back is cash boot.
Mortgage Boot
Mortgage boot is debt relief. If you owed $200,000 on the old property but borrow only $150,000 on the replacement, the $50,000 drop in debt is treated as boot. The IRS views shedding debt the same way it views pocketing cash.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
The Netting Rules
Mortgage boot can be offset by contributing additional cash. If debt drops by $50,000 between properties, writing a $50,000 check at the replacement closing eliminates the debt relief boot. New financing on the replacement also offsets debt paid off on the relinquished property.
The reverse does not work. Cash boot is not offset by taking on more debt on the replacement property. Pocket $20,000 from the exchange and that $20,000 is taxable even if you borrowed $100,000 more on the new property than you owed on the old one. This is where taxpayers get tripped up. Excess debt and excess cash do not wash against each other; the IRS treats them separately.
Step 3: Which Closing Costs Count
Exchange expenses — costs tied directly to completing the transaction — reduce the amount realized and effectively raise the basis of the replacement property. Brokerage commissions, title insurance, recording fees, transfer taxes, attorney fees for the exchange, and qualified intermediary fees all qualify.
Financing costs do not. Loan origination fees, discount points, mortgage insurance premiums, and lender-required appraisals are costs of getting a loan, not costs of acquiring property. A useful test: if the expense would not exist in an all-cash transaction, it is probably a financing cost. Financing costs paid out of exchange proceeds can even create boot, because the IRS treats them as spending exchange funds on something other than the replacement property.
Step 4: Apply the Formula
Section 1031(d) sets out the statutory calculation.3Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Written as a worksheet:
- Start with the adjusted basis of the relinquished property.
- Add any additional cash paid toward the replacement property.
- Add any additional debt assumed beyond debt relieved.
- Add recognized gain (the taxable portion driven by boot).
- Add qualifying exchange expenses you paid.
- Subtract cash boot received.
- Subtract net debt relief (mortgage boot).
Whenever boot received equals recognized gain — which happens any time realized gain exceeds boot — those two lines cancel. The worksheet then collapses to: old basis, plus anything extra you put in, minus any net debt relief not offset by cash.
The Shortcut
You can also get to the same number by subtracting deferred gain from the purchase price of the replacement property. Deferred gain is realized gain minus recognized gain. If you know what you paid and how much gain rolled forward, you are done. Both methods produce the same result. The shortcut is faster; the line-item version reconciles more cleanly to Form 8824.
Worked Example
Say you sell a rental with an adjusted basis of $300,000. Realized gain from the exchange is $200,000. You buy a replacement for $475,000 and receive $25,000 in cash boot. You pay $5,000 in exchange expenses (commissions, QI fees, title costs).
Recognized gain is the lesser of $200,000 or $25,000, so you are taxed on $25,000. Deferred gain is $200,000 − $25,000 = $175,000.
Shortcut: $475,000 − $175,000 = $300,000.
Line-item: $300,000 (old basis) − $25,000 (cash received) + $25,000 (recognized gain) + $5,000 (exchange expenses) − $5,000 (already reflected in the replacement cost) = $300,000.
Either way, the replacement property’s adjusted basis is $300,000. That is what you depreciate, and it is what gets subtracted from the sale price the day you eventually sell without exchanging.
Splitting the Basis for Depreciation
The number from your worksheet does not go onto a single depreciation schedule. Treasury regulations split it into two pieces.
The exchanged basis is the portion carried over from the relinquished property. It keeps depreciating under the same method and over the remaining recovery period of the old property. Fifteen years left on a 27.5-year residential schedule? Those fifteen years carry forward for this slice.
The excess basis is any additional value from extra cash contributed, extra debt taken on, or exchange expenses paid. This portion starts a new schedule — 27.5 years for residential rental, 39 years for nonresidential — as if you had just acquired that piece.
You can elect out of the split and treat the entire replacement property as newly placed in service, starting a fresh schedule on the full basis. The election is made on Form 4562 with your timely filed return for the year you acquire the replacement.4Internal Revenue Service. About Form 4562, Depreciation and Amortization Which route wins depends on where you are in the old property’s recovery period.
Where the Worksheet Lands on Form 8824
The completed exchange goes on Form 8824 (Like-Kind Exchanges), attached to your federal return for the year you transferred the relinquished property. The form asks for fair market values, adjusted bases, boot received, exchange expenses, realized gain, and recognized gain. Your replacement property basis lands on line 25.5Internal Revenue Service. Instructions for Form 8824
Depreciation on the replacement is claimed on Form 4562, flowing into Schedule E if the property produces rental income. If you split the basis into exchanged and excess buckets, you will show two depreciation entries for the same property.
Two Situations That Change the Worksheet’s Result
Related-party exchanges — with siblings, spouses, ancestors, lineal descendants, or entities you control — require both parties to hold the exchanged property for at least two years after the exchange. If either side disposes of the property within that window, the exchange loses its tax-deferred status and the gain becomes taxable retroactively. Form 8824 must be filed for the two tax years after a related-party exchange, not just the year of the transfer.5Internal Revenue Service. Instructions for Form 8824
A handful of states, including California, Massachusetts, Montana, and Oregon, have clawback provisions that can require state tax on the deferred gain when you exchange in-state property for out-of-state property. State reporting requirements vary, so verify additional filings if your exchange crosses state lines.