Investor bookkeeping

1031 Exchange Accounting: How to Record and Track a Like-Kind Exchange

April 17, 2026 · David Semerdjian, GSD Accountants

A 1031 exchange lets you sell an investment property and defer the capital gains tax by rolling into a replacement property. Every investor knows that part. What almost nobody tells you: the accounting doesn’t disappear. It gets deferred and tracked. And unlike most bookkeeping mistakes, a botched 1031 entry doesn’t blow up this year. It blows up years later, when you finally sell for good and someone has to prove what your basis actually is.

We’ve cleaned up enough of these to say it plainly: the exchange itself usually goes fine. It’s the books afterward that quietly go wrong.

The two-minute version of the rules

You already know these if you’re mid-exchange, so briefly: sell one investment property, identify a replacement within 45 days, close within 180 (or by your tax-filing deadline for that year, extensions included, if it comes first), and route the money through a qualified intermediary. You never touch the proceeds. Miss a rule and the deferral fails.

That’s the legal side, and it belongs to your attorney and your QI. Our lane is what happens inside your books once the exchange closes. That’s where this guide stays.

What comes off the books, and what goes on

Three things happen in a correctly recorded exchange:

1. The relinquished property comes off. Its original cost and its accumulated depreciation are both removed from the balance sheet.
2. The replacement property goes on at carryover basis. Not at what you paid for it. This is the single most important line in this post.
3. The deferred gain goes onto a permanent schedule. It’s not income and it doesn’t hit the P&L. It lives in a supporting schedule that follows the new property for as long as you own it, or until it rolls into the next exchange.

The instinct to record the new building at its purchase price is exactly what makes 1031 books wrong. The purchase price is what the deal cost. The carryover basis is what the property is worth to your books after the deferral.

The basis math, step by step

Here’s the calculation with round numbers. Say you exchange a duplex and buy a fourplex:

The fourplex does not go on the books at $750,000. Its basis is:

1. Start with the relinquished property’s adjusted basis: $210,000
2. Add the new money you put in: +$150,000
3. Result: $360,000 carryover basis in the replacement property

Cross-check it: replacement cost ($750,000) minus deferred gain ($390,000) is $360,000. Same answer from both directions. If your numbers don’t reconcile both ways, something’s off.

Why it matters: every year of future depreciation, and the gain at the eventual sale, runs off $360,000. Not $750,000. Book it at purchase price and you overstate depreciation every year and understate the taxable gain at exit. That problem compounds silently.

Boot, the part that surprises people

Boot is anything you walk away with that isn’t like-kind real estate. Cash left over because you bought down, or net debt relief because the new mortgage is smaller than the old one. Boot is taxable in the exchange year, up to your realized gain.

For the books, that means boot can’t hide inside the closing entry. It gets identified, recorded on its own line, and flagged to your CPA. The classic miss: an investor trades down slightly, pockets $30,000 at closing, and nobody records it as boot. Until the CPA finds it in April. Or worse, doesn’t.

Depreciation after the exchange: two streams

This is where the most DIY damage happens. After a 1031, the replacement property depreciates in two separate streams:

One property, two schedules, running side by side. A single blended schedule, which is what most self-managed books end up with, overstates one stream and understates the other. By year three the depreciation on the books can’t be tied to anything.

The records that must survive

A 1031 is only as good as its paper trail. The file that has to exist, permanently:

• Settlement statements for both the relinquished and the replacement property
• The qualified intermediary’s exchange agreement and closing documentation
• The basis calculation: adjusted basis, boot in and out, carryover and excess basis
• The deferred gain schedule, updated if the property is improved or partially disposed

We keep the basis schedule inside the client’s books as a permanent supporting schedule, because the person who needs it might be a CPA, a lender, or a buyer’s attorney ten years from now. A recent cleanup client came to us three properties into an exchange chain. Every replacement had been booked at purchase price, and the only record of true basis was a spreadsheet the previous CPA kept privately. Rebuilding the chain took longer than the original exchanges did.

What eventually happens to the deferred gain

Deferred doesn’t mean gone. Three exits:

• You sell without another exchange. The deferred gain plus depreciation recapture becomes taxable in the sale year, and the books have to produce the full history on demand.
• You exchange again. The deferral rolls forward and the accounting chain extends. Every prior exchange stays relevant.
• The property passes through your estate. Heirs may receive a stepped-up basis. What that means for your situation belongs to your CPA and attorney. Our job is making sure the schedule is clean and ready either way.

The quick self-test

Pull up your balance sheet. If a property you acquired through a 1031 is sitting there at its purchase price, your books are overstating basis right now, and every depreciation entry since the exchange is built on the wrong number. It’s fixable. A Books Rescue rebuilds the basis chain and the depreciation streams, and the fix gets cheaper the sooner it happens.

For the bigger picture on how investor books should be structured, per-property tracking, flips vs. rentals, and what a clean month looks like, start with our Real Estate Accounting 101 guide.

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