CPA-led 1031 exchange guide
Adjusted Basis in a 1031 Exchange
Adjusted basis is the single most important number on an adjusted basis 1031 exchange analysis that isn't on the closing statement. It determines realized gain, drives boot and depreciation recapture exposure, and carries into the replacement property's depreciation schedule. The basis calculation is straightforward arithmetic — but missing a step changes the deferral analysis. Here's the basis calculation in plain English, with a worked example.
Starting point — original cost
Adjusted basis starts with what you paid for the property: the purchase price plus capitalized acquisition costs (title, recording, legal, certain loan-related fees that were not deductible). Closing statements from the original acquisition are the cleanest source.
Additions — capital improvements
Capital improvements that extended the property's useful life, added value, or adapted it to new uses are added to basis. Examples: a new roof, an addition, a major renovation, structural repairs, HVAC replacement. Routine repairs and maintenance are deductible expenses, not basis additions, and don't increase adjusted basis.
Subtractions — depreciation
Depreciation taken (or allowable, even if not taken) reduces basis. Residential rental is depreciated straight-line over 27.5 years; commercial over 39 years. The cumulative depreciation comes off the basis each year. A property bought for $400,000 with $80,000 of cumulative depreciation has an adjusted basis of $320,000 before any improvements.
Selling expenses
Selling expenses — commissions, escrow fees, transfer taxes, attorney fees on the sale — reduce the amount realized rather than adjusting basis. They lower the calculated gain even though they don't change basis itself. On the math, the effect is similar; the line they appear on is different.
Realized gain — putting it together
Realized gain equals amount realized (sale price minus selling expenses) minus adjusted basis. That realized gain is what a 1031 exchange defers, subject to any boot. Without an accurate adjusted basis, the realized-gain number is wrong, which means the deferral analysis is wrong.
Replacement property basis
The replacement property's basis in a 1031 exchange isn't simply the purchase price. The standard formula starts with the adjusted basis of the relinquished property, adds any additional cash or new debt placed on the replacement, subtracts any boot received, and adjusts for any gain recognized in the exchange. This carryover basis is what gets depreciated going forward.
Why basis affects boot planning
When equity and debt don't match cleanly between the relinquished and replacement properties, the boot calculation depends on adjusted basis. Brandon's CPA-led guidance helps surface the relevant basis records before closing, while i1031 separately executes the Qualified Intermediary workflow.
A worked basis calculation
Suppose a rental was purchased for $400,000 ten years ago. Over the years, $60,000 of capital improvements were added (a new roof and an HVAC overhaul). Cumulative depreciation taken on Schedule E totals $120,000. The basis calculation is straightforward: $400,000 original cost + $60,000 capital improvements − $120,000 depreciation = $340,000 adjusted basis. If the property is now sold for $700,000 with $50,000 of selling expenses, amount realized is $650,000 and realized gain is $310,000 — the figure a 1031 exchange would defer (subject to any boot). Run those numbers through the 1031 exchange tax calculator on this site for a directional view, and pair the result with the depreciation recapture page to see how the $120,000 of prior depreciation factors in.
Documentation to gather
Pull these documents together before your consultation.
- Original closing statement from when you acquired the property
- Records of capital improvements (invoices, contracts)
- Most recent depreciation schedule from your tax preparer
- Current loan payoff and any unamortized loan fees
- Estimated selling costs from the listing or current offer
Frequently Asked Questions
How is adjusted basis different from purchase price?
Purchase price is the starting point. Adjusted basis is purchase price plus capital improvements minus cumulative depreciation — and it can be substantially different after years of ownership.
Why does basis matter in a 1031 exchange?
Basis determines realized gain, drives the boot calculation when equity or debt don't match, and carries forward into the replacement property's depreciation schedule.
Do selling expenses change my basis?
Selling expenses reduce the amount realized rather than adjusting basis. Mathematically they reduce the calculated gain similarly to a basis increase.
What is the replacement property's basis after a 1031 exchange?
The standard formula is: adjusted basis of the relinquished property + new cash or debt added − boot received + any gain recognized. Your CPA records this on the new depreciation schedule.