How to use
Use this worksheet on every §1031 like-kind exchange where the relinquished property carries debt. Each section gives the input, the formula, and the math that produces the minimum replacement loan, the equity-boot exposure, and the timing checkpoints. Not tax advice, engage a §1031 qualified intermediary and tax counsel before relying on the math here.
Section 1. Inputs (collect before sizing)
§1031 debt-replacement math requires the relinquished closing statement, the replacement underwriting, and the QI / EAT timing dates. Pull each from the engagement file before running.
- Relinquished gross sale price (RSP).
- Relinquished mortgage payoff at close (RMP), the actual wire amount, not principal balance.
- Relinquished closing costs (RCC) eligible to reduce gain (commissions, transfer tax, recording).
- Relinquished adjusted basis (RAB).
- Replacement gross purchase price (RPP).
- Replacement loan amount intended (RLN).
- Cash exchanger plans to add at replacement closing (RCA).
- Relinquished closing date (start of 45/180-day clock).
Section 2. Realized gain and deferred gain (formula)
Realized gain = RSP − RAB − RCC. Without the §1031 election, all realized gain is taxable. With a fully-balanced exchange, realized gain is fully deferred. Any boot received is taxable to the extent of realized gain.
- Realized gain = RSP − RAB − RCC.
- Deferred gain = realized gain − total boot received.
- Recognized (taxable) gain = lesser of (realized gain, total boot received).
- Substituted basis in replacement = RAB + (cash added) + (debt assumed in excess of debt relinquished) − (boot received).
Section 3. Debt-replacement test (the core formula)
To fully defer gain, the exchanger must (a) reinvest all net equity from the relinquished sale into the replacement, AND (b) have replacement debt + cash added ≥ relinquished debt paid off.
Minimum replacement loan = max(0, RMP − RCA). If RLN < this amount, the shortfall is mortgage boot, taxable up to realized gain.
- Mortgage boot = max(0, RMP − RLN − RCA). This is debt relief that the exchanger has not offset with new debt or new cash.
- Equity boot = max(0, exchanger's net cash received from the QI not reinvested into replacement). Net equity reinvested must equal RSP − RMP − RCC; any cash held back is equity boot.
- Total boot = mortgage boot + equity boot.
- Recognized gain = min(realized gain, total boot).
Section 4. Worked example (numbered full)
Walk a $20M relinquished sale into a $24M replacement to show the math.
- Inputs: RSP = $20.0M; RMP = $11.0M; RCC = $0.6M; RAB = $7.4M; RPP = $24.0M; RCA = $1.0M.
- Realized gain = 20.0 − 7.4 − 0.6 = $12.0M.
- Net equity from QI = RSP − RMP − RCC = 20.0 − 11.0 − 0.6 = $8.4M (must be reinvested into replacement to avoid equity boot).
- Minimum replacement loan to avoid mortgage boot = RMP − RCA = 11.0 − 1.0 = $10.0M.
- Scenario A: RLN = $14.6M → uses $24.0M − $8.4M (QI equity) − $1.0M (cash added) = $14.6M debt; mortgage boot = max(0, 11.0 − 14.6 − 1.0) = 0; equity boot = 0; full deferral; recognized gain $0.
- Scenario B: RLN = $9.0M → mortgage boot = max(0, 11.0 − 9.0 − 1.0) = $1.0M; recognized gain = min($12.0M, $1.0M) = $1.0M taxable; remaining $11.0M deferred.
- Scenario C: RLN = $14.6M but exchanger only reinvests $7.0M of QI equity (holds back $1.4M cash) → equity boot = $1.4M; recognized gain = min($12.0M, $1.4M) = $1.4M taxable.
Section 5. Reverse exchange (EAT) sizing nuance
When the replacement closes before the relinquished sale, an Exchange Accommodation Titleholder (EAT) parks the replacement under Rev. Proc. 2000-37. Replacement debt at the EAT must match what the exchanger will assume on swap-in.
- Lender must agree to fund directly into the EAT entity at acquisition close (some banks will not).
- EAT-held property must transfer to the exchanger within 180 days of EAT acquisition.
- Loan documents must permit non-disturbance assumption from EAT to exchanger without re-underwriting.
- Confirm title insurer issues a single owner's policy spanning EAT acquisition through swap-in.
Section 6 to 45 / 180-day timing math
The IRS clock is strict, no extensions absent a federally declared disaster. Date math drives lender-package timing.
- Day 0 = relinquished property closing date.
- Day 45 = identification deadline. Exchanger must identify replacement property in writing to QI by 11:59 pm ET.
- Day 180 = exchange completion deadline. Replacement must close (lender funded, deed recorded) by 11:59 pm ET.
- Lender bake-off should be at term-sheet stage by Day 0, running a clean bake-off inside 45 days is rarely realistic for institutional debt.
- Working backward: lender commitment letter target = Day 120; loan committee = Day 90; appraisal back = Day 60.