The short answer
Deferred gain is the realized gain from a section 1031 exchange that is not recognized in the year of the exchange: realized gain minus recognized gain. It does not disappear; it is carried in the replacement property's lower basis and taxed when that property is sold in a taxable sale. If you hold the property until death, section 1014 generally gives the heir a basis equal to fair market value at the date of death, so the deferred gain is not taxed to the heir.
At a glance
| Formula | Realized gain minus recognized gain |
|---|---|
| Form 8824 | Line 24, line 19 minus line 23 |
| Where it is held | In the replacement's basis, which is lower than its value by the deferred amount |
| At death | Heir's basis is generally fair market value at the date of death |
The term is the Form 8824 label for sheltered gain, and section 1031(d) is how it is preserved.
The Form 8824 instructions describe the form as figuring "the amount of gain deferred as a result of a like-kind exchange." Line 24 is the gain realized on line 19 minus the recognized gain on line 23.
Section 1031(d) keeps the deferred amount alive. The replacement's basis is the basis of the property given up, decreased by money received and increased by gain recognized, so it ends up below the replacement's value by exactly the gain that was not taxed.
The deferral can be undone early. If the exchange was with a related party and either of you disposes of the property within two years, the Form 8824 instructions require the deferred gain from line 24 to be reported in the year of that disposition unless an exception applies; see the two-year related-party rule.
Deferred gain is a federal income tax concept. Whether a state follows the same deferral depends on that state's law, which whether a 1031 defers state capital gains tax covers.
In a hypothetical exchange, the deferred gain reappears at the next taxable sale.
Hypothetically, you exchange a property with a $700,000 realized gain into a $1,500,000 replacement and receive $50,000 of cash boot. You recognize $50,000 and defer $650,000. The replacement's basis is $850,000, its $1,500,000 value less the $650,000 deferred.
Years later you sell the replacement for $1,600,000 in a taxable sale. Ignoring depreciation and costs, your gain is $750,000: the $650,000 you deferred plus $100,000 of new appreciation. Depreciation taken on the replacement in the meantime would make it larger. Run your own numbers with your CPA.
On Form 8824 for the first exchange, line 19 would show the $700,000 realized gain, line 23 the $50,000 recognized and line 24 the $650,000 deferred. Line 25 would show the $850,000 basis that carries the deferral forward.
It bites at the next taxable sale and drops away at death.
Exchanging again carries the deferred gain forward into the next replacement's basis, which is how a chain of exchanges keeps building it. The lower basis also means lower depreciation, a point covered under exchanged basis and excess basis.
Section 1014(a)(1) sets the basis of property acquired from a decedent at its fair market value at the date of death. That is why many owners compare a final sale with holding until death; see 1031 versus holding for a step-up and swap-till-you-drop planning.
Publication 551 shows the basis mechanics in its partially nontaxable exchange examples. The deferred gain is never a separate account; it is simply the difference between value and basis.
Related questions
Does deferred gain include gain from past depreciation?
Line 24 is all realized gain not recognized, and realized gain reflects basis already reduced by depreciation. How recapture carries forward is covered in whether a 1031 defers depreciation recapture.
Where is deferred gain tracked after the year of the exchange?
There is no separate federal ledger. The record is each year's Form 8824 and the basis on its line 25, so keep every form and the closing statements behind it.
What happens to deferred gain if I exchange again?
It carries into the next replacement through the same basis rule in section 1031(d). Each later Form 8824 starts from the adjusted basis of the property you give up, which already reflects every earlier deferral.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.