Realized vs recognized gain, boot, the replacement property’s basis and your deadlines, per Form 8824
Updated October 2026
Section 1031 defers gain when you exchange real property held for business or investment for other real property of a like kind. Real properties are generally like kind whether improved or unimproved, so a rental house can be exchanged for land or an apartment building. It does not apply to real property held primarily for sale (such as a flipper’s inventory), to your main home, or to U.S. property exchanged for foreign property. Gain is recognized to the extent you receive money or other property, but a loss is never recognized in the exchange.
In a deferred exchange you sell first and buy later. You must identify the replacement property in writing within 45 days after you transfer the property you give up, and receive it by the earlier of the 180th day or the due date (including extensions) of your tax return for the year of the transfer. For a sale on November 2, 2026, day 45 is December 17, 2026 and day 180 is May 1, 2027, after the April 15, 2027 due date, so you need to extend your 2026 return to keep the full 180 days. Most deferred exchanges use a qualified intermediary to hold the sale proceeds; your agent or a related party cannot serve as one.
Line 15 (boot) = cash received + other property received + net liabilities the other party assumed (their assumption of your mortgage minus any mortgage you take on and cash you add), reduced by exchange expenses. Line 18 = your adjusted basis + exchange expenses not used on line 15 + the net amount you paid. Realized gain (line 19) = line 15 + value received − line 18. Recognized gain (line 20) = the smaller of line 15 and line 19. Deferred gain = realized minus recognized. New basis (line 25) = line 18 + recognized gain − line 15.
The IRS’s Form 8824 instructions work this through for Taylor, who trades a $220,000 building (basis $100,000, $80,000 mortgage) for Finley’s $250,000 building ($150,000 mortgage) plus $40,000 cash. Taylor’s boot is the $40,000 cash only, because the $80,000 of mortgage relief does not exceed the $150,000 mortgage Taylor takes on. Line 18 is $100,000 + $70,000 of net liabilities assumed = $170,000; realized gain is $290,000 − $170,000 = $120,000; recognized gain is $40,000; basis in the new building is $170,000. The calculator reproduces those lines, and Finley’s ($30,000 boot, $75,000 realized, $175,000 basis). It does not split the recognized gain into section 1245 or 1250 recapture (line 21), which in the instructions’ extended example changes Taylor’s deferred gain from $80,000 to $70,000 or $80,000 depending on the recapture facts.
| Exchange | Boot (line 15) | Realized gain | Taxable now | Deferred | New basis |
|---|---|---|---|---|---|
| $900,000 rental for $1,100,000, no boot (default) | $0 | $480,000 | $0 | $480,000 | $620,000 |
| Same, but $50,000 cash taken out | $30,000 | $480,000 | $30,000 | $450,000 | $650,000 |
| Trade down: new mortgage $100,000 smaller (debt relief boot) | $80,000 | $480,000 | $80,000 | $400,000 | $400,000 |
| Partial exchange: $200,000 kept as cash | $180,000 | $480,000 | $180,000 | $300,000 | $400,000 |
| Form 8824 example: Taylor | $40,000 | $120,000 | $40,000 | $80,000 | $170,000 |
| Form 8824 example: Finley | $30,000 | $75,000 | $30,000 | $45,000 | $175,000 |
Taking $50,000 out costs tax on $30,000 here because $20,000 of exchange costs offset the cash. Buying a property with a smaller mortgage counts the $100,000 of debt relief as boot, less costs. To defer everything, buy at least as much value, take on at least as much debt (or add cash), and take nothing out.
The deferred gain is carried into the new property through its lower basis, so depreciation continues on that carried-over basis and the gain is taxed when you eventually sell without exchanging. Exchanges with related parties must be reported on Form 8824 for two more years, and if either side disposes of the property within 2 years of the last transfer, the deferred gain generally becomes taxable that year. If a qualified intermediary fails to meet the timing rules, the exchange may not qualify.
It does not compute depreciation recapture (Form 8824 line 21), multi-asset exchanges, exchanges involving a former home under section 121, reverse or improvement exchanges, state tax, or the tax rate on the recognized gain. It assumes a single property on each side. Exchanges involve escrow, intermediary and title steps that a mistake can disqualify; use a qualified intermediary and a tax professional before you close.
Touching the money. If sale proceeds are paid to you rather than held by a qualified intermediary, the exchange can fail.
Missing day 45. The deadlines are counted in calendar days and do not stretch for weekends.
Forgetting mortgage boot. Paying off a $300,000 loan and buying with a $200,000 loan creates $100,000 of boot even if you received no cash.
Not extending the return. A sale in the last months of the year can see the 180-day window cut short by the April due date.
Exchanging property held for sale. Flips and lots held as inventory do not qualify.