What a 1031 exchange does
A 1031 like-kind exchange (named for Section 1031 of the tax code) lets you sell an investment property and reinvest the proceeds into another investment property while deferring the tax you would otherwise owe on the sale. That deferred tax has three parts: depreciation recapture (up to 25% on the depreciation you claimed), long-term capital gains tax on the rest of your profit, and any state tax on the gain. Deferring all three keeps your full equity compounding into the next property instead of handing a large slice to the IRS.
The estimate works by figuring the tax you'd owe on an outright sale, then treating that whole amount as deferred:
- Net sale price = sale price − selling costs.
- Total gain = net sale price − adjusted basis (purchase price − depreciation).
- Tax due now = recapture (25% of depreciation, capped at the gain) + capital gains tax on the remainder + state tax on the gain.
- Deferred with a 1031 = that entire amount.
Worked example
You bought for $300,000, claimed $50,000 depreciation, and sell for $400,000 with no selling costs, a 15% capital gains rate, and no state tax. Your adjusted basis is $250,000 and total gain is $150,000. Recapture on the $50,000 depreciation at 25% is $12,500; the remaining $100,000 gain at 15% is $15,000; state tax is $0. You'd owe $27,500 on an outright sale — and a 1031 exchange defers all $27,500. Enter these values above to confirm.
The 45- and 180-day deadlines
A 1031 exchange has strict timing. You must identify your replacement property within 45 days of closing the sale, and close on it within 180 days. The proceeds must be held by a qualified intermediary (QI) — you can't touch the cash — and the replacement should be of equal or greater value to fully defer the tax. Missing a deadline generally blows the exchange and makes the gain taxable.
Deferral, not forgiveness
A 1031 defers tax; it doesn't erase it. Your deferred gain rolls into the basis of the new property. But investors who keep exchanging can defer indefinitely, and heirs may receive a stepped-up basis. To understand the recapture piece on its own, use the depreciation recapture calculator; to see how the depreciation built up, see the rental depreciation calculator.
Frequently asked questions
What is a 1031 exchange?
A like-kind exchange that lets you reinvest sale proceeds into another investment property while deferring recapture and capital gains tax.
How much can it defer?
The full federal recapture (up to 25%), capital gains tax on the remaining gain, and any state tax. This calculator estimates that total.
What are the deadlines?
Identify a replacement property within 45 days and close within 180 days of the sale.
Does it eliminate the tax?
No — it defers it. The gain carries into the replacement property, though continued exchanges and a step-up at death can defer or eliminate it.
Related calculators
- Depreciation Recapture Calculator — the recapture piece in detail.
- Rental Property Depreciation Calculator — how the depreciation accrues.
- Cost Segregation Calculator — accelerate depreciation on the replacement property.
- Cash-on-Cash Return Calculator — return on the next deal.