Carryover Basis

In this section, we discuss carryover basis often used in 1031 exchange calculations. Code Section 1012 provides that the basis of a property is its purchase price or original cost unless specified otherwise. Under the 1031 exchange rule, however, the basis is not the purchase price but the carryover basis. We have already discussed the adjusted basis, the carryover basis is based on the adjusted basis.

1031 exchange and carryover basis

In a 1031 exchange where there is no boot received, the basis of the replacement property is the basis carried over from the relinquished property. The carryover basis may be increased by the amount of any additional consideration added at the time of acquisition.

Carryover basis example

If the original cost of acquisition of a real estate property is $100,000 and improvements were made to that capital asset making the adjusted basis of $150,000. The property value has appreciated to $300,000, say. With all else being equal, if this property were to be sold, the capital gain tax on the property will be on the capital gain of $300,000 - $150,000 or $150,000.

However, if the property is not sold but exchanged instead. A 1031 exchange can be made and the owner of the property can exchange it. Let's say the property is exchanged for another of $500,000 value. The carryover basis in the new 1031 exchanged property will be $350,000.