A like-kind exchange journal entry removes the relinquished property from your books at its original cost, clears its accumulated depreciation, and records the replacement property at its calculated tax basis rather than fair market value. Under Section 1031 of the Internal Revenue Code, you can defer capital gains tax when you swap one piece of real property held for business or investment for another of like kind. Since the Tax Cuts and Jobs Act took effect in 2018, this deferral applies only to real property, not equipment, vehicles, artwork, or other personal property. The entries below cover a clean swap, an exchange with cash boot received, an exchange with cash boot paid, and how mortgage debt relief plugs into the same framework.
Numbers You Need Before Posting the Entry
Four figures drive every like-kind exchange entry. Nail them down first and the debits and credits fall into place.
Adjusted basis of the relinquished property is original cost minus accumulated depreciation and other downward adjustments. It is the starting point for every gain calculation.
Realized gain is the total economic profit on the exchange: the fair market value of everything you receive (including cash and debt relief), minus your adjusted basis. It captures the full profit but says nothing about what is taxable this year.
Recognized gain is the portion you owe tax on immediately. In a clean exchange with no boot, recognized gain is zero. When you receive boot, recognized gain equals the lesser of realized gain or boot received. Any realized gain that isn’t recognized is deferred, not forgiven; it gets baked into the lower basis of the replacement property and surfaces when you eventually sell.
Basis of the replacement property ties the entry together. Section 1031(d) sets the formula: start with the adjusted basis of the relinquished property, add any boot you paid and any recognized gain, then subtract any boot you received. The result sits below the replacement property’s fair market value by exactly the amount of the deferred gain. That gap is what preserves the future tax liability without needing a separate deferred-gain account on the books.
Exchange With No Boot
The simplest case is a straight swap where both properties have the same fair market value and nothing else changes hands. Assume these facts for Property A traded 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 carries over at $300,000, identical to the old property’s adjusted basis.
| Account | Debit | Credit |
|---|---|---|
| Replacement Asset (Property B) | $300,000 | |
| Accumulated Depreciation—Property A | $200,000 | |
| Property A Asset Account | $500,000 |
Debits and credits both equal $500,000. There is no separate deferred-gain line. The deferral lives inside the gap between Property B’s $600,000 fair market value and its recorded $300,000 basis. When you sell Property B down the road, that gap becomes taxable gain.
Exchange With Boot Received
When cash or non-like-kind property comes in on top of the replacement asset, that extra value is boot, and it triggers immediate taxable gain. Same Property A facts. This time you receive Replacement Property C worth $500,000 plus $100,000 in cash.
Realized gain is still $300,000: the $500,000 value of Property C plus $100,000 cash, minus the $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 is $300,000: old basis of $300,000, plus recognized gain of $100,000, minus boot received of $100,000. The recognized gain and boot happen to cancel here, leaving a straight carryover figure. The $200,000 deferred gain sits in the gap between the $500,000 fair market value and the $300,000 recorded basis.
| 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 both total $600,000. The $100,000 credited to gain flows through the income statement and your tax return for the year of the exchange.
Exchange With Boot Paid
Paying boot runs the other way: you add cash to acquire a higher-value replacement. Because you receive nothing beyond like-kind real property, no gain is recognized.
Same Property A facts. You acquire Replacement Property D worth $700,000 and pay $100,000 in cash to cover the difference.
Realized gain is $300,000. Recognized gain is zero because no boot was received. Property D’s basis is $400,000: $300,000 old basis plus $100,000 boot paid. The cash payment lifts the replacement basis because it is fresh investment. The $300,000 deferred gain sits in the gap between Property D’s $700,000 fair market value and its $400,000 basis.
| 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 both total $600,000. No taxable gain appears.
When Mortgage Debt Relief Creates Boot
Cash isn’t 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. It catches people off guard because no money actually hits the bank account, yet it can trigger recognized gain.
Suppose your relinquished property carries a $200,000 mortgage the buyer assumes, and you take on a $100,000 mortgage on the replacement property. Net debt relief is $100,000. That $100,000 functions as boot received, and recognized gain is calculated exactly as in the cash boot example.
You can offset debt relief with cash. If you paid an extra $100,000 into the exchange equal to the net debt reduction, the cash boot paid would cancel the mortgage boot received, leaving zero net boot and zero recognized gain. Reducing your debt load 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 lands on the debit side as if you received cash, and the replacement property’s basis is reduced accordingly. Net debt assumed, where you take on more debt than you shed, works like boot paid and increases the basis of the replacement property.
Book vs. Tax Treatment
The entries above reflect tax accounting. Financial reporting under GAAP can differ. Under ASC 845, a nonmonetary exchange with commercial substance (meaning the company’s future cash flows change meaningfully as a result) 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. If you keep both sets of books, the difference is a temporary timing difference tracked as a deferred tax liability until the replacement property is sold.
Depreciating the Replacement Property
Once the exchange is on the books, the replacement property’s calculated basis becomes the starting point for depreciation. Because this basis is lower than fair market value, your annual depreciation deductions will be smaller than if you had simply bought the property outright. That reduced depreciation is part of how the IRS eventually collects on the deferred gain.
For tax purposes, the basis often needs to be split into two pieces, 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 of the replacement property as newly placed in service, putting 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 potential change in depreciation timing before making it.