The short answer
Exchanged basis is the part of a replacement property's basis carried over from the relinquished property, and excess basis is any basis above that, usually from cash or new debt you added. Reg. section 1.168(i)-6 depreciates exchanged basis over the old property's remaining schedule and treats excess basis as property newly placed in service. You can elect out and treat the whole basis as new property, but the election is made on Form 4562 by the return due date and can be revoked only with IRS consent.
At a glance
| Rule | Reg. section 1.168(i)-6 |
|---|---|
| Exchanged basis | The lesser of the replacement's section 1031(d) basis or the relinquished property's adjusted depreciable basis |
| Excess basis | Treated as placed in service in the year of replacement |
| Election out | On Form 4562 by the due date with extensions; revocable only with IRS consent |
The terms come from the depreciation regulations, which split one basis into two schedules.
Under Reg. section 1.168(i)-6(b)(7), exchanged basis is the lesser of the replacement's basis under section 1031(d) or the adjusted depreciable basis of the relinquished property. Paragraph (b)(8) defines excess basis as any excess of the section 1031(d) basis over the exchanged basis.
Paragraph (c) keeps the exchanged basis on the old track. If the replacement's recovery period is longer, the longer period applies as if the replacement had been placed in service when the old property was; if it is shorter, the old period continues. Paragraph (d)(1) treats excess basis as placed in service in the year of replacement, with the current recovery period, method and convention.
Publication 551 calls the first portion carryover basis and allocates both portions among the replacement assets by fair market value. Section 7701(a)(44) supplies the general Code term, exchanged basis property, for property whose basis is set by reference to other property.
In a hypothetical exchange, one building ends up with two depreciation schedules.
Hypothetically, your relinquished rental building has an adjusted depreciable basis of $300,000 with part of its recovery period left. You add cash and a larger loan, and the replacement building's basis under section 1031(d) is $800,000. Land is ignored for simplicity.
Exchanged basis is $300,000 and keeps depreciating over the old remaining period. Excess basis is $500,000 and starts a fresh recovery period in the year of replacement. Run your own numbers with your CPA.
It bites in the depreciation math and in a one-time election for each exchange.
Under Reg. section 1.168(i)-6(i)(1), you can elect not to apply the split; the sum of exchanged and excess basis is then treated as placed in service at the time of replacement. The election does not change gain under section 1031 or recapture under sections 1245 and 1250.
Paragraph (j) requires a separate election for each exchange, made by the due date, with extensions, of the return for the year of replacement, in the manner Form 4562 provides. A partnership or S corporation makes it, not the owners, and revocation needs IRS consent granted only in extraordinary circumstances.
Bonus depreciation follows the split. Under Reg. section 1.168(k)-2(g)(5)(iii), if qualifying replacement property meets the used-property acquisition rules, only the remaining excess basis is eligible; if it meets the original-use rule, both portions are. See depreciating replacement property and bonus depreciation and cost segregation on a replacement.
Related questions
Is excess basis the same as new money?
Usually it reflects cash or new debt you added, but the regulation defines it mechanically as the section 1031(d) basis above the exchanged basis. Gain recognized on boot also raises section 1031(d) basis.
Who makes the election in a partnership?
The partnership, not the partners separately, under Reg. section 1.168(i)-6(j)(1). An S corporation makes it for its shareholders, and the common parent makes it for a consolidated group.
Where does my replacement's basis come from in the first place?
From section 1031(d), as the deferred gain entry explains. For the full calculation see basis in replacement property after a 1031.
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.