Cost Basis After a 1031 Exchange — How Carryover Basis Works

Carryover basis in one sentence

Your new property's basis is the old property's remaining basis, plus whatever extra you paid to trade up — not the price you paid for the new property. That gap between price and basis is exactly your deferred gain, riding along until a future taxable sale.

Example Your old rental has a basis of $250,000 and sells for $600,000 net — a $350,000 deferred gain. You buy a replacement for $700,000. Its basis isn't $700,000; it's roughly $250,000 + the $100,000 trade-up = $350,000. Sell it later for $750,000 without exchanging and your taxable gain is $400,000 — the old deferred gain plus the new growth.

What it means for your depreciation

Lower basis means smaller depreciation deductions on the new property than its price would suggest. The default method splits your depreciation in two: the carried-over portion continues on the old property's remaining schedule, while only the trade-up amount starts a fresh 27.5-year clock. (Taxpayers can elect to treat the whole basis as newly placed in service instead — simpler, sometimes slower. This is squarely tax-preparer territory.)

Why investors accept the lower basis

Because deferral has two exits that beat paying now: exchange again later and keep deferring (swap till you drop), or hold until death, when heirs may receive a stepped-up basis at market value that erases the deferred gain under current law. Meanwhile, the money that would have gone to the IRS keeps compounding in your property instead.

See your deferred gain in dollars →The main calculator shows exactly how much rides into your new basis

Common Questions

Why is my new property's basis lower than what I paid for it?

Because the deferred gain from the old property is subtracted from it. The lower basis is the mechanism that keeps the postponed tax on the books until a future taxable sale.

Do I depreciate the new property from its purchase price?

No — from its carryover basis, which is lower. The default rule continues the old depreciation schedule for the carried portion and starts a new schedule only for the trade-up amount.

Where is the basis calculation reported?

Form 8824, filed with your tax return for the year of the exchange, walks through the deferred gain and the new basis. Keep it forever — it is the paper trail for every future sale.