Post-1031 Exchange Checklist: Records, Basis Tracking and Next Steps After Closing

Build the exchange file: the documents your next sale will need

Realized's checklist adds the purchase and sale agreement with its exchange cooperation clause, and the IRS record-keeping page says that for a nontaxable exchange you keep the records on the old property as well as the new one until the limitations period expires for the year you dispose of the new property. In practice the file follows every property in the chain until the last one is sold or inherited.

• Settlement statements for the relinquished sale and every replacement closing, showing the intermediary as the party funding the purchase.
• The exchange agreement, the assignments of both contracts, and the buyer's and seller's acknowledgements of the assignment.
• The identification notice with proof of delivery before day 45, and any revocation.
• The intermediary's account ledger from receipt of proceeds to final disbursement, including interest earned and fees charged.
• Purchase contracts, deeds and title policies for the replacement, plus the lender's closing package if debt was placed.
• Your depreciation schedule and cost history for the relinquished property back to its purchase, and any cost segregation study.
• Form 8824 as filed, the worksheet behind it, and any state exchange forms.

Form 8824 belongs with the return for the year you sold, even if you bought in the new year

The Form 8824 instructions require the form with the return for the year you transferred the relinquished property, so a November 2026 sale whose replacement closed in March 2027 is reported on the 2026 return, and an extension may be needed to have the replacement figures in hand. A related-party exchange under §1031(f) needs the form for the two following years as well, because a disposition inside two years unwinds the deferral.

Flag these items for your preparer: the exchange expenses that reduce line 15 and add to line 18, the net liabilities assumed by each side, whether more than one replacement was received (the instructions then require an attached statement instead of lines 12 through 18), the identification and receipt dates on lines 5 and 6, and any recognized gain, which goes to Form 4797 line 5 or 16 or to Schedule D.

Legal 1031's post-exchange list adds Form 4797 for any boot, a state return that reports the exchange with any nonresident withholding reconciled, and Form 4868 if the exchange was still open at the filing deadline.

Worked example: a $600,000 replacement basis split into two depreciation schedules

Hypothetical: you sold a rental for $1,000,000 with an adjusted basis of $400,000 (cost $550,000 less $150,000 of straight-line depreciation over ten years) and bought a $1,200,000 replacement with the $1,000,000 of proceeds plus $200,000 of new cash, recognizing no gain. Under §1031(d) and Form 8824 line 25 the replacement's basis is the $400,000 carried over plus the $200,000 you added, or $600,000, and the $600,000 of deferred gain is the figure to carry in the file.

Reg. §1.168(i)-6 then splits that basis: the exchanged basis, $400,000, keeps depreciating over the relinquished property's remaining 17.5 years on the same method and convention, while the $200,000 of excess basis is treated as property placed in service on the replacement closing date and starts its own 27.5- or 39-year schedule. Land allocation applies to both pieces, so a $600,000 basis with 20% land leaves $480,000 to depreciate across the two schedules.

If you prefer one schedule, the Form 4562 instructions let you attach a statement reading 'Election made under section 1.168(i)-6(i)' to a timely filed return and depreciate the whole $600,000 as new property; the election is irrevocable without IRS consent and gives up the faster recovery of the old basis. Under §1223(1) the replacement also inherits the relinquished holding period, which matters if you sell within a year of closing.

Update title, insurance, lenders and managers in the first thirty days

Do not move the replacement into a different entity or add a co-owner without advice: Legal 1031 warns against transferring title to a different taxpayer after closing, because it invites the argument that you never held the property for investment. Family entity planning covers how to restructure without that risk.

• Confirm the recorded deed vests title in the exchanging taxpayer or its disregarded entity, and for reverse or improvement exchanges, move the titleholder LLC's registration and insurance into your own name as Legal 1031 advises.
• Bind property, liability and flood coverage naming the correct owner and lender, and cancel the relinquished policy only after the sale has recorded.
• Send the lender the entity documents it requires and calendar the loan maturity, any rate reset and the prepayment window.
• Sign the management agreement, transfer tenant deposits and leases, and calendar lease expirations and renewal notices.
• Set up California's FTB 3840 if a California property was exchanged for out-of-state property, and check the equivalent rule on your state's page under 1031 rules by state.
• For a DST interest, complete the sponsor's investor paperwork and expect an annual operating statement rather than a K-1; see how DST income is taxed and reported.

Plan the next exit now: two years, five years and the step-up

Two clocks start at closing. If the exchange involved a related party, the two-year rule in §1031(f) runs from the last transfer and a disposition inside it triggers the deferred gain; and if you ever intend to live in the replacement, the Schedule D instructions bar the home-sale exclusion for five years after acquiring a home in a like-kind exchange, as buying a future retirement home explains.

Decide which of three exits the property is being held for: another exchange when the equity outgrows the asset (when to redeploy low-return equity), a 721 contribution into a REIT operating partnership that ends future exchanges but simplifies inheritance (DST to 721 UPREIT roll-ups), or holding until death for the basis step-up (1031 vs holding for step-up).

Write the deferred gain, the two basis figures and the depreciation taken to date on a one-page summary and review it each year with the loan and lease calendar, because the answer to sell, exchange or hold changes with your age, your bracket and the property's remaining depreciation. Confirm any restructuring with your CPA or attorney first.

Retention: the file outlives the property, not the return

The IRS limitation periods are three years for most returns, six years if income was underreported by more than 25%, and unlimited for an unfiled or fraudulent return, but the property rule governs an exchange: keep records relating to property until the period expires for the year you dispose of it. Because each exchange carries basis forward, the first property's cost records stay relevant to the last property's sale, potentially decades later.

Scan the file, keep a copy in the CPA's permanent file, and give your heirs or executor its location; the executor's guide explains why the deferred-gain history matters even when a step-up erases it.