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1031 Exchange Calculator

Defer capital gains by exchanging into like-kind property. See the boot, the tax owed, and the tax deferred.

Inputs

Property Sold

Replacement Property

Tax Rates

Results

Tax Deferred via Exchange
$96,000
Tax Owed Now (boot)
$0
Tax If Sold Outright
$96,000
Adjusted Basis$240,000
Realized Gain$465,000
Boot (taxable portion)$0
Recognized Gain (taxable now)$0
Deferred Gain$465,000
New Basis (in replacement)$435,000

Sam's Take

A 1031 exchange is the closest thing to magic in the tax code — defer capital gains and depreciation recapture indefinitely, as long as you keep exchanging. The trick is the timing rules: 45 days to identify replacement, 180 days to close, and you cannot touch the proceeds in between (use a qualified intermediary). The catch most people miss: deferred basis carries over. If you 1031 a $300K basis property into a $900K replacement, your basis in the new property is $300K, not $900K. Eventually you pay — unless you die holding the property, in which case heirs get a stepped-up basis and the deferred tax disappears entirely.

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DepreciationCap RateRental Property

What a 1031 exchange actually is

A 1031 exchange — named after Section 1031 of the IRS code — lets a real estate investor sell one investment property and buy another without paying capital gains tax (or depreciation recapture) on the sale. The tax isn't forgiven. It's deferred. You'll owe it eventually if you sell without exchanging again, but until then, every dollar of gain stays invested instead of going to the IRS.

For long-term operators this is one of the most powerful tools in the tax code. Roll a $500K gain into a bigger property, defer ~$120K of federal tax, get a bigger building. Do that 4 times over 30 years and you've compounded an extra million dollars of capital that would otherwise have been taxed away.

The timing rules — these will trip you up if you're not ready

  • 45 days to identify. From the day you close on the sale, you have 45 days to formally identify up to 3 candidate replacement properties (more under specific rules). 45 days goes fast when you're trying to find a building you want to own for 10 years.
  • 180 days to close. From the day you close on the sale, you have 180 days total to actually close on the replacement. So 45 days to pick it, then ~135 days more to get it under contract and through closing.
  • You cannot touch the money. If the cash from the sale lands in your bank account, even for a second, the exchange dies and you owe full tax. The proceeds have to be held by a "qualified intermediary" (QI) — a third party who holds the funds and forwards them at closing on the replacement. Hire a real QI before you list the property. Don't try to DIY this.
  • Investment property only. The property you sell and the one you buy both have to be held for investment or business use, not personal residence. "Like-kind" is broader than people think — any US real estate held for investment qualifies as like-kind to any other. You can swap a triple-decker for raw land, or apartments for a strip mall.

"Boot" — the part you can accidentally pay tax on

Boot is anything of value you receive in the exchange that you don't reinvest. Boot is taxable. Two kinds to watch for:

  • Cash boot. If you sell for $750K and buy for $700K, that $50K difference is cash you took out — and it's taxed as gain. Same if you take any cash off the closing table.
  • Debt boot. If you sold a property with a $400K mortgage and buy one with only a $300K mortgage, that $100K of debt you didn't replace is treated as boot — and it's taxed.

To fully defer the gain, the replacement has to (a) cost at least as much as the net sale price, and (b) carry at least as much debt as the property you sold. Cash and debt can substitute dollar-for- dollar — so if you bring in extra cash you can carry less debt, and vice versa.

The basis carryover — the catch nobody mentions

Here's the part that surprises first-time exchangers: your basis in the replacement property is not its full purchase price. It's the replacement price minus the deferred gain. So if you sell for $750K with $50K basis (meaning $700K of gain), and exchange into a $900K property, your basis in the new building is $200K — not $900K. That means:

  • You get smaller depreciation deductions going forward (depreciation is calculated on basis, and your basis is way lower than the price tag).
  • You owe a much bigger tax bill if you eventually sell without exchanging again.

This is why the 1031 strategy really only works long-term if you do one of two things: (1) keep exchanging forever — every sale rolls into the next exchange, deferred gain piles up but never gets paid, or (2) hold until you die. When your heirs inherit the property, they get a "stepped-up basis" equal to the property's market value at your death, which wipes out all the deferred gain. Tax-free forever. This is one of the more powerful estate strategies in the US tax code, sometimes called "swap till you drop."