# Realized vs. Recognized Gain: Formula and 1031 Examples

> Compare realized and recognized gain, calculate adjusted basis, and see how cash boot and mortgage debt affect a 1031 exchange in worked examples.

Source: https://baker1031.com/learn/realized-vs-recognized-gain


By Jerry Baker, Founder, Baker 1031 Investments. Updated November 2, 2026. Topic: Taxes & Planning. Draft for review; not yet approved by Aurora Securities.

## The short answer

Realized gain is the amount realized from a sale or exchange minus your adjusted tax basis. Recognized gain is the portion included in income under the applicable tax rules. If a qualifying 1031 exchange produces $500,000 of realized gain and $50,000 of taxable cash boot, you generally recognize $50,000 and defer $450,000.

## Key takeaways

- Realized gain is the amount realized minus your adjusted basis. It's set by the numbers on the sale, whether or not you owe any tax.
- Recognized gain is the part of the realized gain you must include in income for the year. Under the tax code, all realized gain is recognized unless a specific rule says otherwise.
- A 1031 exchange, a condemnation replacement and a contribution to a partnership are the main real estate rules that let realized gain go unrecognized for now. The gain is deferred, not forgiven.
- In a 1031 exchange, you recognize the smaller of your realized gain or the boot you receive. Boot is cash, other non-like-kind property, or net debt relief.
- Deferred gain lowers the basis of your new property. That's how the tax code keeps track of the gain until a later taxable sale.

## Realized vs. recognized gain at a glance

| Measure | What it answers | How to calculate it |
|---|---|---|
| Realized gain | How much gain did the transaction produce? | Amount realized minus adjusted basis |
| Recognized gain | How much gain enters income under the tax rules? | Apply the recognition rules and any applicable limits |
| Deferred gain in a qualifying exchange | How much gain carries into the replacement investment? | Realized gain minus recognized gain |
| Cash proceeds | How much money remains after closing? | Sale proceeds minus costs, debt payoff and other closing adjustments |

Recognized gain is an income amount. Your tax bill also depends on the character of the gain, applicable rates, deductions and other facts. [IRS Publication 544](https://www.irs.gov/publications/p544) explains the relationship between realization, recognition and exchange deferral.

### Example: the same $550,000 gain under three choices

Assume a hypothetical investment-property sale for $1,000,000, $50,000 of selling expenses and $400,000 of adjusted basis. There is no debt and no separate depreciation-recapture adjustment. The amount realized is $950,000, producing $550,000 of realized gain.

| Transaction | Recognized gain | Deferred gain |
|---|---|---|
| Taxable cash sale | $550,000 | $0 |
| Qualifying exchange with no boot | $0 | $550,000 |
| Qualifying exchange with $50,000 of taxable cash boot | $50,000 | $500,000 |

In the third case, assume $900,000 goes into replacement real property and $50,000 comes back as cash. The simplified replacement basis is $900,000 minus $500,000, or $400,000. These figures illustrate the rules rather than an individual tax result. Have your CPA confirm the treatment of your expenses, debt and depreciation using the [Form 8824 instructions](https://www.irs.gov/instructions/i8824).

If this connects to a planned sale, the [1031 boot calculator](/tools/1031-boot-calculator) can help you organize the exchange numbers. My [DST guide](/learn/dst-guide) explains one potential replacement-property structure.

## What is the difference between realized and recognized gain?

These two terms sound alike, and people mix them up. The difference is simple once you see it.

**Realized gain** is the profit you actually made on a sale or exchange. It's a math result. You take what you got for the property and subtract your tax cost in it.

**Recognized gain** is the part of that profit you have to put on your tax return as income this year. It's a legal result. It depends on which tax rules apply to the deal.

Most of the time, the two numbers are the same. You sell a rental for cash, and all the gain you realized is recognized. But some rules let you postpone the tax. When one applies, part or all of your realized gain isn't recognized yet.

Here's a way to picture it. Realized gain is the size of the bill. Recognized gain is the part of the bill that's due now.

### What does "unrealized gain" mean?

You'll also hear the phrase unrealized gain, or a "paper gain." That's growth in value on property you still own. If your building was worth $1 million when you bought it and is worth $1.5 million today, you have $500,000 of unrealized appreciation.

Unrealized gain isn't taxed. Nothing has happened yet that the tax code counts. Once you sell or exchange the property, the gain becomes realized. Then the question becomes how much of it is recognized.

So there are really three stages:

1. **Unrealized.** The property went up in value, but you still own it. No tax event.
2. **Realized.** You sold or exchanged it. The gain is now measured.
3. **Recognized.** The part of the realized gain you report as income this year.

### Is "recognized income" the same idea?

Yes, it's the same idea applied more broadly. Income can be realized in an economic sense and still not be recognized on your return yet. In real estate, the term comes up most with gains on a sale or exchange, so that's what this guide focuses on.

## What does the tax code say?

The core rules sit in one short section of the Internal Revenue Code, [26 U.S.C. §1001](https://www.law.cornell.edu/uscode/text/26/1001). It's worth reading the key lines, because the wording maps directly onto the two terms.

### Section 1001(a): how gain is measured

Section 1001(a) says "The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis." A loss is the reverse: adjusted basis over the amount realized.

That's your realized gain or loss.

### Section 1001(b): what "amount realized" means

Section 1001(b) says "The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received."

So the amount realized includes cash and the value of any property you got back. Debt counts too, as I explain below.

### Section 1001(c): the default is full recognition

Section 1001(c) is the key line for this topic. It says: "Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized."

Read it twice. The default is that every dollar of realized gain is recognized. Recognition is the rule. Deferral is the exception, and you only get it when another section of the code "otherwise provides."

### The Treasury regulation

The Treasury regulation at [26 CFR §1.1001-1(a)](https://www.law.cornell.edu/cfr/text/26/1.1001-1) adds the idea of what triggers a realization. It refers to gain or loss realized "from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent." Selling a building for cash plainly qualifies. So does trading it for a different building.

### How the IRS says it in plain language

[IRS Publication 544](https://www.irs.gov/publications/p544) puts the whole idea into a few sentences. "Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes." It continues: "Recognized gains must be included in gross income." And: "However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes."

That's the relationship in one paragraph.

## How do you calculate realized gain?

You need two numbers: the amount realized and your adjusted basis.

### Step 1: Find the amount realized

Start with the sale price. Subtract your selling costs, such as commissions, escrow, title and transfer taxes. Add the fair market value of any property you received.

Then count debt. [Treasury Regulation §1.1001-2(a)(1)](https://www.law.cornell.edu/cfr/text/26/1.1001-2) says the amount realized "includes the amount of liabilities from which the transferor is discharged." Publication 544 says the same thing more simply: "The amount you realize also includes any of your liabilities that were assumed by the buyer."

In practice, if your sale price is $900,000 and $300,000 of it pays off your mortgage, the payoff is still part of the $900,000. It doesn't reduce the amount realized.

### Step 2: Find your adjusted basis

Your basis starts as your cost. [26 U.S.C. §1012](https://www.law.cornell.edu/uscode/text/26/1012) says "The basis of property shall be the cost of such property." You add capital improvements and subtract depreciation.

[IRS Publication 551](https://www.irs.gov/publications/p551) says to reduce basis by "Deductions previously allowed (or allowable) for amortization, depreciation, and depletion." So depreciation you were entitled to take lowers your basis, even if you never claimed it.

I cover basis in more depth in my main guide to [real estate capital gains tax](/learn/capital-gains-tax-on-real-estate), including what counts as an improvement.

### Step 3: Subtract

Amount realized minus adjusted basis equals realized gain. If the answer is negative, you have a realized loss.

### A calculation example

This is hypothetical, with round numbers.

- Sale price: $900,000
- Selling costs: $50,000
- Amount realized: $850,000
- Adjusted basis: $350,000 (a $500,000 purchase, plus $50,000 of improvements, minus $200,000 of depreciation)
- **Realized gain: $500,000**

If you sell for cash and nothing else applies, your recognized gain is also $500,000.

## When is realized gain not recognized?

Section 1001(c) only steps aside when another rule "otherwise provides." In real estate, these are the rules that come up most.

### A 1031 exchange

[26 U.S.C. §1031(a)(1)](https://www.law.cornell.edu/uscode/text/26/1031) says "No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment" when it's exchanged for like-kind real property held the same way.

Notice the wording. It doesn't say no gain is realized. The gain is realized and measured. The statute provides for nonrecognition when its conditions are met. That's why it's called a nonrecognition rule.

The exchange has strict rules. You must identify replacement property in writing within 45 days of your sale. You must close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. A qualified intermediary, or QI, must hold your sale money so you never touch it. My guide to the [1031 exchange rules and timeline](/learn/1031-exchange-rules) covers each requirement.

### A condemnation or casualty

When the government takes your property, or it's destroyed and you get insurance money, the gain is realized. [26 U.S.C. §1033](https://www.law.cornell.edu/uscode/text/26/1033) lets you elect to recognize gain "only to the extent that the amount realized upon such conversion" exceeds the cost of qualifying replacement property.

The replacement window is generally two years after the close of the first tax year in which you realize any gain. For condemned real property held for business or investment, the statute extends it to three years. My guide to the [1033 exchange for condemnation and casualty](/learn/1033-exchange-condemnation-casualty) explains the details.

### A contribution to a partnership

[26 U.S.C. §721(a)](https://www.law.cornell.edu/uscode/text/26/721) says "No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." This is the rule behind a 721 exchange, where you contribute property to a REIT's operating partnership in return for partnership units. A REIT is a real estate investment trust, a company that owns income-producing property. Its operating partnership is the entity that holds the REIT's properties.

### An installment sale changes the timing

An installment sale is a little different. It doesn't make gain disappear, even for a while. It spreads recognition over the years you're paid.

Under [26 U.S.C. §453(b)(1)](https://www.law.cornell.edu/uscode/text/26/453), an installment sale is one where "at least 1 payment is to be received after the close of the taxable year" of the sale. All of the gain is realized at the sale. You recognize it bit by bit as payments arrive.

### Excluded is not the same as unrecognized

There's one more category that people confuse with deferral: exclusion. Under [26 U.S.C. §121](https://www.law.cornell.edu/uscode/text/26/121), you can exclude up to $250,000 of gain on the sale of your main home, or $500,000 for many married couples filing jointly. You must have owned and used it as your principal residence "for periods aggregating 2 years or more" in the five years before the sale.

Excluded gain is realized, and then it's simply left out of income for good. It isn't carried into your next home's basis. That's different from a 1031 exchange, where the unrecognized gain follows you into the new property.

Section 121 also has limits. Gain from depreciation taken after May 6, 1997, can't be excluded. My guide to the [1031 exchange and your primary residence](/learn/1031-exchange-primary-residence) explains how the two rules can work together on a former home.

### Comparing the outcomes

| Term | What it means | Taxed this year? | Taxed later? |
|---|---|---|---|
| Unrealized gain | Increase in value on property you still own | No | Only if you later sell or exchange |
| Realized gain | Amount realized minus adjusted basis | Depends on recognition | Depends on recognition |
| Recognized gain | Part of realized gain included in income now | Yes | No, it's done |
| Deferred gain | Realized but not yet recognized | No | Yes, generally in a future taxable sale |
| Excluded gain | Realized but permanently left out of income | No | No |

## How does recognition work in a 1031 exchange?

A 1031 exchange rarely lines up perfectly. You might keep some cash. You might buy a cheaper property. You might pay off a big mortgage and take on a smaller one. Each of these can make part of your realized gain recognized.

### The boot rule

Anything you receive in an exchange that isn't like-kind real property is called boot. The word isn't in the statute, but it's how everyone in the industry talks.

Section 1031(b) says that when you receive money or other property along with the like-kind property, the gain is recognized, but not more than the sum of the money and the fair market value of the other property.

So your recognized gain is the **smaller** of two numbers:

1. Your realized gain, or
2. The boot you received.

You never recognize more than your realized gain. If you receive $200,000 of boot on a deal with $120,000 of realized gain, you recognize $120,000.

### Debt relief counts as boot

When the other side takes over your debt, or your loan is paid off at closing, that's treated like cash. Section 1031(d) says such an assumption "shall be considered as money received by the taxpayer on the exchange."

This is often called mortgage boot. It surprises sellers who never saw a dollar of cash.

### The netting rules on Form 8824

The IRS's [instructions for Form 8824](https://www.irs.gov/instructions/i8824) show how the netting works. Line 15 adds up three things:

- "Any cash paid to you by the other party;"
- "The FMV of other (non-like-kind) property you received, if any; and"
- "Net liabilities assumed by the other party."

That last item is the amount by which debt the other side took over is more than the total of debt you took on, cash you paid, and other property you gave up. The instructions also say to reduce the total by exchange expenses.

Two practical rules come out of that formula:

1. **Debt you take on, or cash you add, can offset debt you were relieved of.** If you paid off a $300,000 loan and take on a $300,000 loan on the new property, there's no net debt relief.
2. **New debt can't offset cash you take out.** Cash paid to you sits on its own line. It isn't reduced by the new loan you take on.

My guide to the [partial exchange and how boot is taxed](/learn/partial-1031-exchange-boot) goes deeper on these netting rules. You can also test your numbers with my [1031 boot calculator](/tools/1031-boot-calculator).

### Losses aren't recognized in an exchange

The rules cut both ways. Section 1031(a) says no gain or loss is recognized. Section 1031(c) adds that when you receive boot in an exchange at a loss, "no loss from the exchange shall be recognized." If your property has lost value, an exchange can cost you a deduction you'd get in a taxable sale.

### Where the deferred gain goes

The gain you don't recognize doesn't vanish. It lowers the basis of your new property.

Section 1031(d) says the new property takes the basis of the property you gave up. That basis is reduced by any money you received and increased by any gain you recognized. A common shortcut for simple cases is:

**Basis of new property = cost of new property − deferred gain**

When you later sell the new property in a taxable sale, the lower basis produces a bigger realized gain. The deferred gain comes back then.

## Worked example: the same sale, five ways

This is one hypothetical seller, with simple round numbers. It doesn't represent any client or offering, and it isn't tax advice.

### The starting point

Lena owns a rental building with these numbers:

- Sale price: $900,000
- Selling costs: $50,000
- Amount realized: $850,000
- Adjusted basis: $350,000, after $200,000 of depreciation
- **Realized gain: $500,000**

In versions 1 through 3, she owns the building free and clear. In versions 4 and 5, she has a $300,000 mortgage that's paid off at closing.

### Version 1: a taxable sale

Lena sells for cash and doesn't exchange.

- Realized gain: $500,000
- Recognized gain: $500,000
- Deferred gain: $0

All of it goes on her return this year. Part of it is the depreciation slice, which can be taxed at up to 25% federally. My guide to [how depreciation is taxed when you sell](/learn/depreciation-recapture) explains that layer.

### Version 2: a full exchange

Lena's QI holds the $850,000. She buys a replacement property for $1,000,000. She uses all $850,000 and takes a new $150,000 loan.

- Boot received: $0
- Realized gain: $500,000
- Recognized gain: $0
- Deferred gain: $500,000
- Basis of the new property: $1,000,000 − $500,000 = **$500,000**

She reinvested all her cash and bought more than her amount realized. Nothing came back to her, so nothing is recognized.

### Version 3: she keeps $50,000

This time Lena buys an $800,000 replacement and keeps $50,000 of cash.

- Cash boot: $50,000
- Realized gain: $500,000
- Recognized gain: the smaller of $50,000 and $500,000 = **$50,000**
- Deferred gain: $450,000
- Basis of the new property: $800,000 − $450,000 = **$350,000**

Check it the long way under §1031(d). Old basis of $350,000, minus $50,000 of cash received, plus $50,000 of gain recognized, equals $350,000. The two methods agree.

### Version 4: mortgage boot

Now Lena has a $300,000 mortgage that's paid off at closing. Her amount realized is still $850,000, and her realized gain is still $500,000. The QI holds $550,000 after the payoff.

She buys a $700,000 replacement with the $550,000 and a new $150,000 loan.

- Debt relieved: $300,000
- New debt taken on: $150,000
- Net debt relief, or mortgage boot: **$150,000**
- Recognized gain: the smaller of $150,000 and $500,000 = **$150,000**
- Deferred gain: $350,000
- Basis of the new property: $700,000 − $350,000 = **$350,000**

Lena didn't get any cash. She still recognizes $150,000 because her debt went down and she didn't replace it.

### Version 5: fixing the mortgage boot with cash

Lena wants to avoid that tax. She buys an $850,000 replacement instead. She uses the $550,000 from the QI, adds $150,000 of her own savings, and takes a $150,000 loan.

- Debt relieved: $300,000
- Offsets: $150,000 of new debt plus $150,000 of cash she paid
- Net debt relief: **$0**
- Recognized gain: **$0**
- Deferred gain: $500,000
- Basis of the new property: $850,000 − $500,000 = **$350,000**

Adding cash offset the debt she didn't replace. The reverse doesn't work. If Lena had kept cash out and borrowed more to make up for it, the cash she kept would still be boot.

### The five versions side by side

| Version | Boot | Realized gain | Recognized gain | Deferred gain | New basis |
|---|---|---|---|---|---|
| 1. Taxable sale | n/a | $500,000 | $500,000 | $0 | n/a |
| 2. Full exchange | $0 | $500,000 | $0 | $500,000 | $500,000 |
| 3. Keeps $50,000 cash | $50,000 | $500,000 | $50,000 | $450,000 | $350,000 |
| 4. Mortgage boot | $150,000 | $500,000 | $150,000 | $350,000 | $350,000 |
| 5. Cash offsets debt | $0 | $500,000 | $0 | $500,000 | $350,000 |

Look at the "Realized gain" column. It's the same $500,000 every time. The deal structure changed only how much of it was recognized. That's the whole point of the distinction.

To see how much tax a full exchange might defer on your own numbers, try my [1031 tax deferral calculator](/tools/1031-tax-deferral-calculator).

## Worked example: when the realized number is a loss

Here's a different hypothetical. Sam bought a small retail building for $600,000. After $100,000 of depreciation, his adjusted basis is $500,000. The market has dropped, and his amount realized on a sale would be $450,000.

- Realized loss: $450,000 − $500,000 = **−$50,000**

If Sam sells for cash, the loss is generally recognized. A rental used in a business is usually Section 1231 property. Under [26 U.S.C. §1231](https://www.law.cornell.edu/uscode/text/26/1231), when your Section 1231 losses for the year exceed your gains, they aren't treated as capital losses. That generally means they can offset ordinary income.

If Sam does a 1031 exchange instead, the $50,000 loss isn't recognized. It's carried into the new property's basis instead. He'd lose the deduction this year.

That's why a 1031 exchange isn't automatic. When your realized number is a loss, the nonrecognition rule may work against you.

## Worked example: a home sale with an exclusion

This one is also hypothetical. A married couple sells the home they've lived in for ten years. They file jointly.

- Amount realized: $1,100,000
- Adjusted basis: $400,000
- Realized gain: **$700,000**
- Excluded under Section 121: $500,000
- Recognized gain: **$200,000**

The $200,000 is reported and taxed. The $500,000 is excluded for good. It's not deferred into their next home.

The 3.8% net investment income tax follows the same split. The [IRS's NIIT questions and answers](https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax) say the tax "does not apply to any amount of gain that is excluded from gross income" for regular income tax purposes. So only the recognized $200,000 can be subject to it.

## Worked example: an installment sale

One last hypothetical. Lena from the main example sells her free-and-clear building on an installment basis instead of exchanging.

- Amount realized: $850,000
- Realized gain: $500,000
- Sale price, which is also the contract price here since there's no mortgage: $900,000
- Down payment in 2026: $180,000
- The rest is paid over the next several years, with interest

[IRS Publication 537](https://www.irs.gov/publications/p537) says the gross profit percentage "is figured by dividing your gross profit from the sale by the contract price." Her gross profit is the $500,000 gain, which already accounts for her selling costs. So her gross profit percentage is $500,000 ÷ $900,000, or about 55.6%.

So of the $180,000 down payment, about $100,000 is recognized gain in 2026. The rest is a return of her basis. Each later payment works the same way, and the interest is taxed separately as ordinary income.

The whole $500,000 was realized at the sale. Recognition generally follows the installment payments. There's a catch here too. Publication 537 says "you must report any depreciation recapture income in the year of sale," even if no payment came in that year. Section 453(i) says the same thing. Recapture income here means gain taxed as ordinary income under §1245 or §1250. In this hypothetical, all of Lena's depreciation was straight-line on the building, so she has no recapture income, and her depreciation slice is reported as payments come in.

## How do you work out your realized and recognized gain, step by step?

Here's a process you can follow before you sell. Then have your CPA check it.

### Step 1: Find your adjusted basis

Pull your purchase closing statement, your improvement records and your depreciation schedule. Basis equals cost, plus improvements, minus depreciation allowed or allowable.

### Step 2: Estimate your amount realized

Start with the expected price. Subtract selling costs. Add the value of any property you'll receive. Don't subtract your mortgage payoff.

### Step 3: Compute realized gain

Amount realized minus adjusted basis. If it's negative, think hard before doing an exchange, since the loss won't be recognized.

### Step 4: Identify which nonrecognition rule could apply

Ask whether this is a 1031 exchange, a 1033 replacement, a 721 contribution, an installment sale, or a home sale with a Section 121 exclusion. If none applies, all of the realized gain is recognized.

### Step 5: Total your boot

For an exchange, add up cash you'll receive, the value of non-like-kind property, and net debt relief. Remember that cash you add can offset debt relief, but new debt can't offset cash you take.

### Step 6: Compute recognized gain

Recognized gain is the smaller of your realized gain and your boot.

### Step 7: Compute deferred gain and new basis

Deferred gain is realized gain minus recognized gain. In a simple case, your new property's basis is its cost minus the deferred gain.

### Step 8: Figure the tax on the recognized part

The recognized gain is taxed in layers. The depreciation part can be taxed at ordinary rates up to 25%. The rest gets long-term capital gains rates. The 3.8% net investment income tax may apply on top, plus state tax.

### Step 9: Report it

An exchange is reported on Form 8824. The instructions say that if you transferred property in a like-kind exchange during the year, "you must file Form 8824 with your tax return for that year."

## Where do these numbers show up on Form 8824?

Form 8824 is built around the realized vs. recognized split. Here's how the key lines line up with the terms in this guide, based on the IRS instructions.

| Form 8824 line | What it holds | Term in this guide |
|---|---|---|
| Line 15 | Cash received, other property received, and net liabilities assumed by the other party, reduced by exchange expenses | Boot |
| Line 18 | Adjusted basis of what you gave up, plus certain expenses and net amounts you paid | Your side of the basis math |
| Line 19 | "Subtract line 18 from line 17" | Realized gain or loss |
| Line 20 | "Generally, enter the smaller of line 15 or line 19, but not less than zero" | Recognized gain, before recapture split |
| Line 23 | Sum of the ordinary income recapture and the remaining recognized gain | Total recognized gain |
| Line 24 | Line 19 minus line 23 | Deferred gain |
| Line 25 | "your basis in the like-kind property you received" | New basis |

Your CPA prepares the form, but it helps to know what each line is doing. If line 20 isn't zero, some of your gain was recognized.

## Mistakes to avoid

These are common misunderstandings. Each one can lead to a surprise tax bill.

1. **Thinking "no cash" means "no tax."** Net debt relief is treated as money received. You can recognize gain without getting a check.
2. **Subtracting the mortgage payoff from the gain.** The payoff doesn't reduce the amount realized. Your realized gain is the same whether or not you had a loan.
3. **Assuming deferred gain is gone.** It moves into the basis of your new property. A later taxable sale brings it back.
4. **Treating excluded gain and deferred gain as the same.** Section 121 excluded gain is permanently out of income. 1031 deferred gain is waiting for you.
5. **Taking out cash and borrowing more to "cover it."** New debt doesn't offset cash you receive. The cash is still boot.
6. **Exchanging property with a built-in loss.** A 1031 exchange can stop you from recognizing a loss you'd otherwise deduct.
7. **Ignoring depreciation you never claimed.** Basis drops by depreciation allowed or allowable. That raises your realized gain whether you took the deduction or not.
8. **Forgetting that recognized boot is often taxed at the higher layers first.** Recognized gain in an exchange is generally taxed first as depreciation-related gain, which can carry a 25% federal rate.
9. **Missing exchange deadlines.** If you miss the 45-day deadline, or the deadline of 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first, the exchange can fail. Then all of your realized gain is recognized.
10. **Letting sale money reach you.** If you control the proceeds, the exchange can fail. A QI has to be in place before your sale closes.

## Why does this matter for DST investors?

Many sellers exchange into a Delaware Statutory Trust, or DST. A DST is a trust that owns real estate, and many investors each hold a fractional interest in it.

Under [IRS Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf), "A taxpayer may exchange real property for an interest in the Delaware statutory trust" without recognizing gain, "if the other requirements of § 1031 are satisfied." So a DST interest can qualify as replacement property, and your realized gain can stay unrecognized.

The same boot rules apply. If you don't reinvest all your cash or replace your debt, the shortfall is boot. My [DST guide](/learn/dst-guide) explains how DSTs work, including their limits. They're securities sold mostly to accredited investors, meaning people who meet the SEC's income or net worth tests. They're illiquid, and you have no control over the property. Distributions are not guaranteed, and you can lose your entire investment.

When a DST eventually sells its property, you'll have a new realized gain. It includes the gain you deferred going in. You'll face the same choice again: recognize it, or try to defer it with another exchange. Under current law, heirs who inherit property generally get a basis equal to its value at death under [26 U.S.C. §1014](https://www.law.cornell.edu/uscode/text/26/1014). My guide to [the step-up in basis](/learn/step-up-in-basis) explains what that means for deferred gain.

Giving property away during your life works differently. Under [26 U.S.C. §1015](https://www.law.cornell.edu/uscode/text/26/1015), the person who receives a gift generally takes the same basis "as it would be in the hands of the donor." So the deferred gain passes to them.

## What my data shows

The figures below describe my October 2026 records. See the [current DST offering statistics](/data/dst-offerings) for the latest published totals.

As founder of Baker 1031 Investments, I've worked in real estate acquisitions, management and development; [my background](/about) lists the firms. My records track DST offerings, not anyone's tax results. A few numbers still connect to how much gain gets recognized in an exchange.

Here is what [my offering records](/data/dst-offerings) as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They aren't a forecast or a promise about any future offering.

### Low minimums can make leftover cash easier to place

The median minimum investment is $100,000. Minimums range from $25,000 to $500,000, and **21 offerings (28%) start at $25,000**.

This matters for recognition. Exchange cash you don't reinvest becomes boot, and boot is recognized. A lower minimum can make it easier to place the last part of your exchange money.

### Debt levels affect mortgage boot

In my offering records as of October 2026, 36 of 76 (47%) are all-cash, with no debt. Another 16 (21%) have loan-to-value above 50%. Loan-to-value, or LTV, is the loan divided by the property's value. The median LTV among offerings with debt is about 49%.

If you paid off a loan when you sold, net debt relief can be recognized as boot unless you replace the debt or add cash. A DST with debt carries debt that can count toward replacing it. An all-cash DST has no property loan to count toward replacement debt. It still carries property, operating and investment risks.

### Each future sale is a new realization event

A 10-year projected hold is the most common, at 31 offerings. Others project 5 to 10 years or 7 years, and a few are 2-year programs. Each time a DST sells its property, the gain you deferred becomes part of a new realized gain, and you'll decide whether it's recognized.

You can see the offerings I currently have available on my [investment offerings page](/invest).

## Frequently asked questions

### What is the difference between realized gain and recognized gain?

Realized gain is your total profit on a sale or exchange: the amount realized minus your adjusted basis. Recognized gain is the part you must report as income this year. They're the same unless a rule such as a 1031 exchange lets you defer part of it.

### Is recognized gain the same as taxable gain?

Mostly, yes. Recognized gain is the amount included in your income for the year, which is then taxed at the rates that apply. Rate rules, such as the 25% cap on the depreciation part, decide how much tax you pay on it.

### Can you have a realized gain but owe no tax?

Yes. In a full 1031 exchange, your realized gain can be entirely unrecognized, so no tax is due this year. The gain is deferred and lowers the basis of your new property.

### How is recognized gain calculated in a 1031 exchange?

It's the smaller of your realized gain or the boot you receive. Boot includes cash, other property that isn't like-kind, and net debt relief. Form 8824 walks through the calculation line by line.

### Does paying off my mortgage at closing create recognized gain?

It can in an exchange. If your new loan, plus any cash you add, is less than the debt that was paid off, the difference is treated as money received. That net debt relief is boot.

### What happens to deferred gain in a 1031 exchange?

It reduces the basis of your replacement property. When you later sell that property in a taxable sale, the deferred gain is realized again and generally recognized. Under current law, a step-up in basis at death may erase it for your heirs.

### Is excluded gain from a home sale the same as deferred gain?

No. Gain excluded under Section 121 is left out of income permanently and doesn't carry into your next home. Deferred gain in a 1031 exchange carries into the new property's basis and can be taxed later.

### Can I recognize a loss in a 1031 exchange?

Generally no. Section 1031 says no gain or loss is recognized on a qualifying exchange. If your property has lost value, a taxable sale may let you deduct the loss instead.

### Does an installment sale change my realized gain?

No. The full gain is realized at the sale, but you generally recognize it as payments come in. Any ordinary-income depreciation recapture, such as on §1245 property, must still be reported in the year of sale.

### Is unrealized gain taxed?

No. Growth in value on property you still own isn't taxed. It becomes realized only when you sell or exchange the property.

## Before you act

Treat this guide as general education, not tax, legal or investment advice; Baker 1031 Investments doesn't provide tax or legal services. Before you sell or exchange, have your CPA, your attorney and your qualified intermediary check your realized and recognized gain figures. DST interests are offered only by private placement memorandum to qualified investors, and you can lose your entire investment. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC.

## Sources

- [26 U.S.C. §121, exclusion of gain from sale of principal residence (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/121)
- [26 U.S.C. §453, installment method (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/453)
- [26 U.S.C. §721, nonrecognition of gain or loss on contribution (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/721)
- [26 U.S.C. §1001, determination of amount of and recognition of gain or loss (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1001)
- [26 U.S.C. §1012, basis of property, cost (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1012)
- [26 U.S.C. §1014, basis of property acquired from a decedent (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1014)
- [26 U.S.C. §1015, basis of property acquired by gifts (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1015)
- [26 U.S.C. §1031, exchange of real property held for productive use or investment (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1031)
- [26 U.S.C. §1033, involuntary conversions (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1033)
- [26 U.S.C. §1231, property used in the trade or business (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1231)
- [26 CFR §1.1001-1, computation of gain or loss (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.1001-1)
- [26 CFR §1.1001-2, discharge of liabilities (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.1001-2)
- [IRS, Instructions for Form 8824, Like-Kind Exchanges](https://www.irs.gov/instructions/i8824)
- [IRS Publication 537, Installment Sales](https://www.irs.gov/publications/p537)
- [IRS Publication 544, Sales and Other Dispositions of Assets](https://www.irs.gov/publications/p544)
- [IRS Publication 551, Basis of Assets](https://www.irs.gov/publications/p551)
- [IRS, Questions and answers on the Net Investment Income Tax](https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax)
- [IRS Revenue Ruling 2004-86](https://www.irs.gov/pub/irs-drop/rr-04-86.pdf)

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Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact