How do I keep track of deferred gain across multiple exchanges?

One roll-forward beats a drawer of closing statements, because each exchange starts from the last line 25

Basis in a chain is sequential. Section 1031(d) makes each replacement's basis the basis of the property given up, adjusted for money, debt and recognized gain, and the Form 8824 instructions say 'the amount on line 25 is your basis in the like-kind property you received.' That figure, reduced by later depreciation and increased by improvements, is the starting point for the next exchange.

So the worksheet is a ledger. Open it with the original purchase price and costs, then post each year's depreciation, each improvement and each exchange's line 25 in order. If one block is missing, every number after it is a guess.

• Original purchase: settlement statement and the land and building split.
• Each year: depreciation claimed, from Form 4562 or the return's depreciation schedule.
• Each improvement: invoices and the date it was placed in service.
• Each exchange: Form 8824, both settlement statements, the exchange agreement and the identification notice.
• Each replacement: the land and building allocation, and the exchanged-basis and excess-basis schedules.

The last property's gap between value and basis already contains every earlier deferral

People often try to total the line 24 deferred gains from each year. That double counts. When no gain was recognized along the way, the realized gain on each new exchange includes the gain deferred on the one before, so the most recent line 24 is the running total at that date.

Recognized boot breaks the simple picture, because it raises basis by the gain taxed. That is one more reason to keep each line 20 and line 23 figure in the ledger rather than reconstructing them from memory.

Worked example: a duplex, a fourplex and an apartment building

Hypothetical, round numbers, costs and land ignored; run your own numbers with your CPA. In 2006 you buy a duplex for $300,000 and take $80,000 of depreciation over ten years, leaving a $220,000 adjusted basis. In 2016 you exchange it, selling for $600,000 with no debt and buying a fourplex for $800,000 with a $200,000 new loan. Realized and deferred gain is $380,000, and the fourplex's basis is $220,000 plus the $200,000 of new debt, or $420,000.

By 2026 you have claimed $120,000 more depreciation, so the fourplex's adjusted basis is $300,000. You sell it for $1,100,000, paying off a $150,000 loan, and buy an apartment building for $1,500,000 with a $550,000 new loan. The new debt covers the $150,000 payoff, so there is no boot. Realized and deferred gain is $800,000, and the new basis is $300,000 minus $150,000 relieved plus $550,000 taken on, or $700,000.

Check it: $1,500,000 paid minus $800,000 deferred equals $700,000. The $800,000 includes the earlier $380,000; it is not added to it. The ledger also shows $200,000 of depreciation across the chain, and section 1250(b)(3) counts depreciation taken 'in respect of the same or other property', so all of it sits in the 25% layer when you finally sell; see the tax when you finally sell.

The retention rule runs to the final sale, not three years from each return

The IRS page on how long to keep records is explicit: 'You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.' Reg. section 1.6001-1(e) states the general rule that records are kept 'so long as the contents thereof may become material'.

Depreciation records matter for a second reason. Section 1250(b)(3) reduces the depreciation counted at sale to the amount actually allowed only 'if the taxpayer can establish by adequate records or other sufficient evidence' that it was less than the amount allowable. Without the schedules you can be taxed as if you took every dollar you were entitled to; see recapture on depreciation never claimed.

Your heirs need less of the history than you do, but a surviving spouse may need all of it

Under section 1014(a), property acquired from a decedent generally takes a basis equal to fair market value at death. For property fully included in the estate, the deferred gain in the chain does not pass to the heirs, and what they need most is a date-of-death appraisal; Publication 544 adds that heirs who receive a Schedule A to Form 8971 must use a basis consistent with the estate tax value.

Married owners are the exception. Section 2040(b) includes only one-half of a qualified joint interest between spouses in the estate, so the survivor's half keeps its carried basis and the full ledger is still needed. Section 1014(b)(6) treats community property differently, which is why the titling question belongs with your estate planner; see DSTs in estate planning.