1031 exchange bookkeeping: the entries and the basis of the new property
In a 1031 exchange your books need three things: the sale entry with the proceeds parked in a Funds held by intermediary account, the purchase entry paid from that account and a new loan, and a deferred gain that is subtracted from the new property so it carries the right tax basis. If the numbers tie, the new basis equals the cost of the new property minus the deferred gain.
The rules the books must follow
A like-kind exchange lets you defer gain when you swap real property held for business or investment for other real property of that kind. The IRS says only real property qualifies for exchanges that started after 2017. See IRS Publication 544. The deadlines of 45 and 180 days are in 1031 exchange deadlines. This post is about the entries.
The key accounting fact: the sale money must not reach you or your LLC. A qualified intermediary holds it and pays for the new property. Cash you receive along the way is "boot," and the gain you must report is generally the smaller of the boot or your total gain. The reporting form and its examples are in the instructions for Form 8824.
The deal we will record
Example a made-up LLC sells an old rental for $400,000. The settlement statement shows $24,000 of selling costs and a $150,000 loan payoff, so $226,000 goes to the intermediary. Land on the books is $60,000, the building cost $240,000, and accumulated depreciation is $50,000, so the adjusted basis is $60,000 plus $240,000 minus $50,000, which is $250,000. The LLC then buys a replacement for $500,000, paid with the $226,000 from the intermediary and a new $274,000 loan, with the price split $80,000 land and $420,000 building.
Amount realized is $400,000 less $24,000, which is $376,000. Gain is $376,000 less the $250,000 adjusted basis, which is $126,000. Because all the proceeds went into the replacement, that $126,000 is deferred rather than reported. Confirm the figures with your preparer, who completes Form 8824.
Entry 1: the sale of the old property
| Account | Debit | Credit |
|---|---|---|
| Funds held by intermediary | $226,000 | |
| Mortgage payable, old loan | $150,000 | |
| Accumulated depreciation | $50,000 | |
| Land | $60,000 | |
| Building | $240,000 | |
| Deferred 1031 gain | $126,000 | |
| Total | $426,000 | $426,000 |
Both sides add to $426,000. The selling costs are already netted out of the $226,000, because the settlement statement paid them from the proceeds. Funds held by intermediary is an asset, because the money is yours, but it is not in your bank account. Deferred 1031 gain is a contra account: it will reduce the cost of the property you buy.
Entry 2: the purchase of the replacement
| Account | Debit | Credit |
|---|---|---|
| Land, new property | $80,000 | |
| Building, new property | $420,000 | |
| Funds held by intermediary | $226,000 | |
| Mortgage payable, new loan | $274,000 | |
| Total | $500,000 | $500,000 |
After this entry Funds held by intermediary is zero, the old property is off the books, and the new property is at cost. Add any purchase closing costs that belong to basis, as in closing costs: deductible or basis.
Keep a one page exchange schedule
Keep one running schedule for the exchange with five lines: the sale date, the date the intermediary received the money, the 45 day and 180 day dates, the date the replacement closed, and the amount of any cash returned. It takes a few minutes to build and answers most of the questions a preparer will ask at filing time.
What the new basis is
On the balance sheet the new property shows $500,000 of cost less the $126,000 deferred gain, which is $374,000. That matches the usual tax formula for an exchange with no boot: old adjusted basis of $250,000, plus the $274,000 of new debt taken on, minus the $150,000 of old debt relieved, which is $374,000. The two methods agree, and that agreement is your check.
Your depreciation base is not simply $374,000 starting fresh. Part of the basis carries over from the old property and part is new money, and preparers track the two pieces separately. See the exchange rules in IRS Publication 946. Give your preparer the settlement statements for both properties, the intermediary's statement and your log of improvements.
If cash comes back: boot
Suppose the replacement had cost less and the intermediary sent cash back to the LLC at the end of the 180 days. That cash is boot. Record it as a deposit to checking and a reduction of Funds held by intermediary, and tell your preparer. Part of the deferred gain is now taxable, up to the amount of the boot. A reduction in debt can also count as boot, which is why the old and new loans need to be on the page.
- Never let the proceeds touch your own bank account before the exchange ends.
- Keep the exchange agreement and the intermediary's statements with the property's documents.
- Keep the old property's records. The deferred gain follows you into the new property and shows up again at the next sale.
How DoorKeeping handles it
In DoorKeeping each property is its own LLC with its own books, so the sale and the purchase can be recorded in the right ledger, with the intermediary balance in between. Ask Claude or ChatGPT to turn the two settlement statements into proposed entries and approve them with one tap. Rent stays in your own bank: tenants pay you directly and DoorKeeping never holds it. DoorKeeping does not give tax advice, and an exchange has strict rules, so involve your tax preparer and an intermediary before you sell.
Sources
- IRS, Publication 544, Sales and Other Dispositions of Assets, read Oct 30, 2026
- IRS, Instructions for Form 8824, Like-Kind Exchanges, read Oct 30, 2026
- IRS, Publication 946, How To Depreciate Property, read Oct 30, 2026
Questions
- How do I record the money held by a 1031 intermediary?
- In an asset account such as Funds held by intermediary. It goes up at the sale and down when the intermediary pays for the replacement property.
- How do I find the basis of the new property?
- Without boot, it is the cost of the new property minus the deferred gain. It also equals the old adjusted basis plus new debt taken on minus old debt relieved.
- What is boot in a 1031 exchange?
- Cash or other value you receive that is not like-kind property, and sometimes debt relief. Your reportable gain is generally the smaller of the boot or the total gain.