Wall Street Real Estate Financial Modeling Practice Test

A 1031 exchange lets you defer capital gains taxes by swapping investment real estate for like-kind property, rather than selling and taking cash. In a pro forma, this attaches as no current tax expense because the sale proceeds are rolled into a replacement property rather than taxed. The basis in the new property generally carries over from the old property (the old adjusted basis), with adjustments if any cash or non-like-kind property (boot) is involved. If you receive boot, you’ll recognize gain to the extent of that boot, and the basis in the replacement property adjusts accordingly (often keeping the overall basis aligned with the carryover). There are also timing rules—identify the replacement property within 45 days and close within 180 days—so the pro forma should reflect the transaction happening within those windows. Note that 1031 exchanges apply to real estate held for investment or business use, not personal residences. This is why the statement describing tax deferral with like-kind reinvestment, possible basis adjustments, and timing constraints best captures how a 1031 exchange works and how it would appear in a pro forma.