When it comes to 1031 tax exchange transactions, there are many details to keep in mind. From time limits to replacement properties to qualified intermediaries, there are many details to track from start to finish. The 1031 exchange transactions are not difficult – but they do come hand-in-hand with plenty of details that have to be carefully managed.

One important thing to keep in mind, however, is the main purpose of the 1031 exchange: to help with tax deferral so that you can have the largest amount of your assets available to you when you need them. All decisions related to exchanges, then, should be viewed in light of how they affect your tax liability now and in the future. Taxes are a major consideration for any real estate investor – especially one who is working with tax deferral tools such as 1031 tax exchange transactions.

In order to keep tabs on your eventual tax responsibility, it is important to have a working knowledge of the idea of basis. To put it simply, basis can roughly be defined as the amount of money you have put into your property. This generally includes the purchase price, any closing costs required to purchase the property, and the cost of any long-term non-depreciable improvements to the property.

Basis can be a complicated issue, and you’ll definitely want to follow the advice of your tax professional each year at tax time. Having a working knowledge of basis, however, is important for any investor looking to participate in tax-advantaged options such as 1031 exchange transactions

Take, for example, the case of an apartment building. You purchased the building for $400,000 a number of years ago. When you bought the property, you paid an additional $7,000 in closing costs. This brought your basis to $407,000. Recently, you made some improvements to the property, adding a new roof for a cost of $20,000 and a back patio at a cost of $5,000. Now, your total basis is $407,000 plus $20,000 plus $5,000 – for a total of $432,000.

In the same way, your basis can also decrease. Say you had a fire on the property. That event might decrease your basis by $30,000 – taking it back down to $402,000. This basis is used when determining depreciation and tax liability.

For undeveloped land, determining basis is done in much the same way. You begin with the price you paid for the land, then add in closing costs and any improvements. In the case of undeveloped land, you may also include necessary expenses such as surveys or recording fees. With all these details to keep track of it’s important that you work with the right 1031 tax exchange specialist who can best meet your needs.