What Is a 1031 Exchange?

A Section 1031 like-kind exchange lets real estate investors defer capital gains tax — including depreciation recapture — by reinvesting sale proceeds into another qualifying investment property, rather than cashing out and paying tax immediately. The gain isn't eliminated; it carries forward into the new property's cost basis.

How the Tax Calculation Works

The depreciation you claimed over the years reduced your taxable income each year — when you sell, that benefit gets "recaptured" and taxed at up to 25%, separately from the rest of your gain, which qualifies for standard long-term capital gains rates.

The Strict Timeline Requirements

• Qualified intermediary required: you cannot touch the sale proceeds directly — a third party holds them
• 45-day identification period: you must identify potential replacement properties within 45 days of selling
• 180-day closing period: you must close on the replacement property within 180 days of the original sale
• Like-kind requirement: both properties must be held for investment or business use — your personal residence doesn't qualify

How to Use This Calculator

Enter your original purchase price and total depreciation claimed (your tax preparer or depreciation schedule has this figure) to establish your adjusted basis. Add your expected selling price and costs. Select your capital gains bracket and whether NIIT applies. Then enter the replacement property price — if it's equal to or greater than your net sale proceeds, the full gain is deferred.

What Happens If You Don't Fully Reinvest ("Boot")

If your replacement property costs less than your net sale proceeds, the difference — called "boot" — is taxable in the year of the exchange, even though the rest of the gain is deferred. This calculator flags any boot and estimates its tax impact, applying depreciation recapture rules first, as the IRS requires.

Worked Example

An investor bought a property for $320,000, claimed $70,000 in depreciation, and now sells for $520,000 with $31,000 in selling costs. Adjusted basis is $250,000, total gain is $239,000. Of that, $70,000 is taxed as depreciation recapture (up to 25% = $17,500) and $169,000 as long-term capital gain (at 15% = $25,350, plus NIIT if applicable). Selling outright costs roughly $42,850–$51,930 in federal tax. A full 1031 exchange into a $550,000+ replacement defers all of it.

Delaware Statutory Trusts (DSTs)

If you want to exit active property management but still complete a 1031 exchange, a DST lets you exchange into fractional, professionally managed ownership of larger institutional-grade real estate — still qualifying as like-kind property under current rules.

State Tax Considerations

Some states (California notably) track 1031 exchanges with "clawback" rules — if you exchange a property in that state for one out-of-state and later sell without exchanging again, the state can tax the originally deferred gain. Check your state's specific rules before exchanging across state lines.

Where This Fits Your Bigger Picture

Compare the ongoing returns of keeping your property against selling and exchanging using our sell vs. keep calculator, and screen replacement properties with our cap rate calculator and cash flow calculator.

Frequently Asked Questions