How Do You Calculate Basis in a 1031 Exchange?

Deferral means your tax attributes travel with you — and basis is the suitcase. The replacement property’s basis determines future depreciation, the eventual taxable gain, and how much the exchange really deferred. The formula is friendlier than it looks.

The core formula

Replacement basis = old adjusted basis + new money added − boot received + gain recognized. In the clean full-deferral case (buy equal-or-up, no boot), it collapses to: old basis plus your buy-up. Sell at $1.2M a property with $400K adjusted basis, buy at $1.4M, and the new basis is $600K — the $800K of deferred gain living on as the gap between basis and value.

What the number drives

Depreciation: the carried basis generally continues on the old schedule while the buy-up increment starts fresh — or an election lets you restart the whole amount (your CPA optimizes this; the allocation between land and improvements on the new deal matters either way, and it’s negotiable intelligence worth capturing at closing). Future sale math: basis is the yardstick against the eventual price — unless the chain runs to the step-up, where the suitcase empties for free. Boot accounting: recognized gain from any boot adds back into basis, so you’re never taxed twice on the same dollars.

Practical hygiene

Keep the Form 8824 workpapers from every exchange forever — each link in a chain depends on the last one’s arithmetic, and thirty-year-old numbers get asked for at the worst times. When exchanging one property into several, basis allocates across replacements in proportion to their values; get the split documented the year it happens. None of this is difficult math — it’s just math that must survive decades of filing cabinets.