How a 1031 exchange calculation works
The gain on the property you give up is split in two: the part matched by boot is taxed now, and the rest is deferred into the replacement property. The worksheet follows the order of Form 8824, Part III, which reports the exchange.[2]
- Boot: cash you receive plus any net reduction in debt, reduced by exchange expenses.
- Realized gain: what you receive, including the replacement property's value, minus the adjusted basis of what you give up and the amounts you pay.
- Recognized gain: the smaller of the boot and the realized gain. This is taxed now.
- Deferred gain: the rest, carried into the replacement property through a lower basis.
Adjusted basis is cost plus improvements minus depreciation,[8] so years of depreciation raise the gain that an exchange defers. In the example, the property bought for less than it sold for, $1,100,000 with a $550,000 loan, leaves $150,000 of cash, which after $50,000 of expenses is $100,000 of boot.
Boot: the part that is taxed now
Boot is anything you receive that is not like-kind real property, mainly cash and relief from debt that you do not replace. The same sale, exchanged four ways:
| Exchange | Replacement price | Taxed now | Deferred | New basis |
|---|---|---|---|---|
| Trade up, more debt | $1,200,000 | $0 | $550,000 | $650,000 |
| Keep some cash (example) | $1,100,000 | $100,000 | $450,000 | $650,000 |
| Pay off debt, buy smaller | $800,000 | $150,000 | $400,000 | $400,000 |
| Add cash, buy bigger | $1,500,000 | $0 | $550,000 | $950,000 |
To defer the whole gain, buy property of equal or greater value and keep the debt at least as high, or add cash to make up the difference. Paying down debt without replacing it is boot even though no cash reaches you: liabilities the other party takes over count as money received.[4] Netting works one way only. New debt you take on, or cash you pay, offsets debt relief, but new debt does not offset cash you receive; in the IRS's own Form 8824 example, the taxpayer is taxed on $40,000 of cash despite taking on $70,000 more debt.[2] The worksheet reproduces that example and the Publication 544 cases exactly.
Rules and deadlines
- Real property only. Section 1031 applies only to exchanges of real property, and real property held primarily for sale, such as a flip, does not qualify.[1]
- U.S. for U.S. Real property in the United States and real property outside it are not like-kind.[1]
- 45 and 180 days. The replacement property must be identified within 45 days and received within 180 days of the transfer, or by the due date of your return including extensions, whichever is earlier.[2]
- Report it. Exchanges are reported on Form 8824 with your tax return.[1][3]
- Do not touch the cash. Receiving the sale money before you get the replacement property turns the exchange into a sale; the regulations' safe harbors include using a qualified intermediary, who must not be your agent.[5]
- How many properties to identify. Up to three properties of any value, or any number whose total value is no more than 200% of what you sold; identifying too many counts as identifying none unless a 95% exception is met.[5][7]
- Related parties. If you exchange with a relative or a related company and either of you disposes of the property within two years, the deferred gain becomes taxable in that year.[6][2]
- Losses. A loss on the like-kind part of an exchange is not recognized.[6]
Estimate, not tax adviceThe calculator applies one combined rate to the gain. In reality, the part of the gain from depreciation is taxed differently from the rest, and exchanges have documentation rules that a tax professional or qualified intermediary should check.
Exchange or sell?
Without an exchange the whole gain is taxable in the year of sale: about $110,000 at the 20% rate entered here. The tax on sale of rental property calculator splits that tax into its parts, using the long-term rates that apply to property held more than a year.[9] Deferral is not forgiveness: the lower basis of the replacement property carries the gain forward and reduces its future depreciation. IRS Publication 544 covers sales, exchanges and other dispositions in detail.[7]
Related tools: the rental property depreciation calculator for the basis you will carry, and the investment property calculator for the replacement property's return.
Frequently asked questions
How do you calculate a 1031 exchange?
Work out the realized gain (what you receive minus your adjusted basis and costs), then the boot (cash and net debt relief, less expenses). The smaller of the two is taxed now; the rest is deferred.
What is boot in a 1031 exchange?
Cash or other non-like-kind property you receive, and any net reduction in your debt. Boot is taxable up to the amount of the gain.
What are the 1031 exchange deadlines?
Identify the replacement property within 45 days and receive it within 180 days of transferring the old property, or by your return due date with extensions if that is earlier.
Can I do a 1031 exchange with a family member?
Yes, but if either of you disposes of the property within two years, the deferred gain becomes taxable in the year of that disposition, with limited exceptions such as death.
Can I do a 1031 exchange on a flip?
No. Real property held primarily for sale does not qualify for a like-kind exchange.
Sources
- Like-kind exchanges – Real estate tax tips
- Instructions for Form 8824, Like-Kind Exchanges
- Form 8824, Like-Kind Exchanges (2026)
- 26 CFR § 1.1031(d)-2, Treatment of assumption of liabilities
- 26 CFR § 1.1031(k)-1, Treatment of deferred exchanges
- 26 U.S. Code § 1031, Exchange of real property held for productive use or investment
- Publication 544 (2025), Sales and Other Dispositions of Assets
- Topic no. 703, Basis of assets
- Topic no. 409, Capital gains and losses