Nontaxable Exchanges: Tax Basis (2025 IRS Guide)

This guide covers “Nontaxable Exchanges” within tax basis. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 551 (12/2025), Basis of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

There are many times when you can't use cost as basis. In these cases, the FMV or the adjusted basis of property may be used. Adjusted basis is discussed earlier.

FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Sales of similar property on or about the same date may be helpful in figuring the property's FMV.

Nontaxable Exchanges

A nontaxable exchange is an exchange in which you're not taxed on any gain and you can't deduct any loss. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. A nontaxable gain or loss is also known as an unrecognized gain or loss.

Like-Kind Exchanges of Real Property

The exchange of real property may qualify as a nontaxable exchange under section 1031 of the Internal Revenue Code.

To qualify as a like-kind exchange, you must hold for business or investment purposes both the real property you transfer and the real property you receive. For more information, see Like-Kind Exchanges in Pub. 544.

The basis of the property you receive is generally the same as the basis of the property you give up.

Example.

You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. The transaction qualifies as a like-kind exchange, so no gain is recognized on the transaction. Your basis in the new property is the same as the basis of the old property ($50,000).

Exchange expenses.

Exchange expenses include the closing costs you pay on the property received (replacement property). They include such items as brokerage commissions, attorney fees, deed preparation fees, etc., as described in Settlement Costs, discussed earlier. If incurred as part of the acquisition of the replacement property, and no gain is recognized on the exchange, add these costs to the basis of the like-kind property received.

Exchange expenses also include the closing costs you pay on the disposition of the property given up. For more information, see Like-Kind Exchanges in Pub. 544

Other expenses and receipts.

Other expenses and receipts that may be reflected on the closing statement (for example, property taxes, rent prorations, security deposits, and repairs) are not exchange expenses. Unlike exchange expenses, other expenses are not added to the basis of property received. For more information, see Like-Kind Exchanges in Pub. 544.

Property plus cash.

If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up plus the money you paid.

Example.

You exchange a parcel of real property (adjusted basis of $30,000) for another parcel of real property (FMV $75,000) and pay $40,000. Your basis in the newly acquired real property is $70,000 (the $30,000 adjusted basis of the old parcel plus the $40,000 paid).

Special rules for related persons.

If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Each person must report any gain or loss not recognized on the original exchange. Each person reports it on the tax return filed for the year in which the later disposition occurs. If this rule applies, the basis of the property received in the original exchange will be its FMV (at the time of the exchange) plus associated exchange expenses paid on the property received. Refer to Settlement Costs under Real Property, earlier in this publication.

These rules generally don't apply to the following kinds of property dispositions.

• Dispositions due to the death of either related person.

• Involuntary conversions.

• Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax.

Related persons.

Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse.

For a list of other related persons (for example, two corporations that are members of the same controlled group, an individual and a corporation if the individual owns directly or indirectly more than 50% of the value of the outstanding stock, a grantor and fiduciary of any trust, etc.), see Nondeductible Loss in chapter 2 of Pub. 544.

Partially Nontaxable Exchange

A partially nontaxable exchange is an exchange in which you receive non-like-kind property or money in addition to like-kind property. The basis of the like-kind property you receive is the same as the adjusted basis of the like-kind property you gave up, with the following adjustments.

1. Decrease the basis by the following amounts.

   1. Any money you receive.

   2. Any liabilities assumed by the other party (or paid off in a deferred exchange) on the like-kind property given up.

   3. Any loss you recognize on the exchange for non-like-kind property given up.

2. Increase the basis by the following amounts.

   1. Any additional costs you incur.

   2. Any liabilities you assume (or new debt incurred) on the like-kind property received.

   3. Any gain you recognize on the exchange.

Example.

You trade a parcel of real property with an FMV of $62,000 and an adjusted basis of $60,000 for another parcel of real property with an FMV of $52,000 and $10,000 cash. You realize a gain of $2,000 (the FMV of the parcel of real property received plus the cash minus the adjusted basis of real property you traded ($52,000 + $10,000 – $60,000)). You must recognize all $2,000 of the gain in income because the gain realized is less than the cash received. Your basis in the newly acquired parcel of real property is as follows:

Allocation of basis.

Allocate the basis first to the non-like-kind property received, other than money, up to its FMV on the date of the exchange. The rest is the basis of the like-kind property.

Example.

You had an adjusted basis of $15,000 in real estate you held for investment. You exchanged it for other real estate to be held for investment with an FMV of $16,000, a truck with an FMV of $3,000, and $1,000 cash. The truck is non-like-kind property. You have a realized gain of $5,000 ($16,000 FMV of real estate + $3,000 FMV of truck + $1,000 cash − $15,000 adjusted basis of real estate given up). You calculate the cash plus the FMV of all non-like-kind property received which totals $4,000 ($3,000 FMV of truck + $1,000 cash). Because this amount is less than the gain realized ($5,000) you recognize gain to the full extent of the $4,000 of cash and non-like-kind property received. The basis in the properties you received is figured as follows:

Allocate the total basis of $18,000 first to the non-like-kind property received in the exchange at its fair market value. The truck is allocated $3,000 and then the rest ($15,000) is the basis of the real estate.

The basis of the real estate is allocated between its carryover basis and excess basis. The carryover basis is the adjusted basis of the property given up, and the excess basis is the remainder of the basis.

To figure the carryover basis and the excess basis allocated to each like-kind asset, the carryover basis is multiplied by the FMV of the individual asset divided by the total FMV of all assets received.

Example.

You held real estate for investment with an FMV of $16,000 and an adjusted basis of $10,000. You exchanged it, along with $4,000 in cash, for other real estate held for investment made up of land with an FMV of $2,000 and depreciable real property with an FMV of $18,000. The carryover basis to be allocated is $10,000 (the adjusted basis of property given up) and the remaining $4,000 is excess basis for a total basis of $14,000 in the replacement property.

The total carryover and excess basis allocated to each asset are calculated as follows:

See Pub. 946 for additional information regarding the application of the special depreciation rules to allocation of basis in a like-kind exchange.

Non-Like-Kind Property Given up

If, in addition to like-kind property, you give up non-like-kind property, you must recognize gain or loss on the non-like-kind property you give up. The basis is the total adjusted basis of the properties given up increased by the amount of gain or decreased by the amount of loss recognized on the non-like-kind property.

Example.

You exchange stock and real estate you held for investment for real estate you also intend to hold for investment. The stock you transfer has a fair market value of $1,000 and an adjusted basis of $4,000. The real estate you exchange has a fair market value of $19,000 and an adjusted basis of $15,000. The real estate you receive has a fair market value of $20,000. Gain realized on the exchange is $4,000. You do not recognize gain on the exchange of the real estate, however, you must recognize (report on your return) a $3,000 loss on the stock because it is non-like-kind property.

The basis of the replacement property received is computed as follows:

Sale and Purchase

If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange.

Example.

You have real property held for productive use in your trade or business. Its adjusted basis is $500,000 and its FMV is $750,000. You're interested in replacing the property with real estate containing a building worth $900,000. Ordinarily, you would swap properties and pay the $150,000 difference in FMVs. Your basis would then be $650,000 ($500,000 adjusted basis in your old property plus $150,000 cash paid).

You want your new real property to have a larger basis for depreciation, so you arrange to sell your old property to the other party. You then buy the new property from that individual for $900,000. However, if the sale and purchase are reciprocal and mutually dependent, you're treated as having exchanged your old property for the new property. In that case, your basis for depreciation for the new property is $650,000, the same as if you had exchanged the old property for the new property.

Partial Business Use of Property

If you have real property, a portion of which is used for business and a portion of which is used for personal use, and you exchange it in a nontaxable exchange for real property to be used wholly or partly in your business, the basis of the property you receive is figured separately for the business and nonbusiness use parts. The part of the property used for business is an exchange of like-kind property. The personal-use part of the property is property on which gain is recognized.

Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property.

You're deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part.

Tip:

If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. For more information, see Pub. 523.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 551 (12/2025), Basis of Assets: Basis Other Than Cost — Nontaxable Exchanges — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.