Taxes
1031 Exchange Calculator
Estimate the tax you can defer by reinvesting sale proceeds into a like-kind property.
Tax breakdown
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How rental property returns work
A 1031 exchange lets real estate investors defer paying capital gains tax on the sale of an investment property by reinvesting the proceeds into a like-kind property. The name comes from Section 1031 of the Internal Revenue Code. Instead of paying tax now, you roll the gain into the next property and defer the bill until you eventually sell that property — or keep exchanging indefinitely. Done well, it is one of the most powerful wealth-building tools available to real estate investors. To estimate how much tax you can defer, you first need your adjusted cost basis — the original purchase price plus any capital improvements, minus accumulated depreciation taken over the holding period. Your realized gain is the sale price minus selling costs minus that adjusted basis. If you have been depreciating the property, a portion of the gain is treated as depreciation recapture, which is taxed at a different rate than the remaining capital gain. The recapture portion is the smaller of your accumulated depreciation or your realized gain. It is taxed at the recapture rate (capped at 25% federally for real property). The remaining gain — the capital gain portion — is taxed at the federal long-term capital gains rate. If your income is high enough, the Net Investment Income Tax (NIIT) of 3.8% may also apply to the entire realized gain. Your state may tax the gain as well. The calculator adds up the recapture tax, capital gains tax, NIIT (if applicable), and state tax to show your total estimated tax deferred — the amount you would owe if you sold without exchanging, but can defer by completing a 1031 exchange. This is not a measure of tax eliminated, only postponed. The deferred gain carries over to the new property, reducing its basis. Strict rules apply: you must identify replacement property within 45 days and close within 180 days, and the new property must be of equal or greater value to defer all the tax. A qualified intermediary must hold the funds — you cannot touch the cash. Use this calculator to see whether the deferral is large enough to justify the effort and restrictions.
Worked example
You bought a rental for $250,000 and added $20,000 in capital improvements. Over the years you took $45,000 in depreciation. You are now selling for $400,000 with $24,000 in selling costs. Your federal capital gains rate is 15%, the recapture rate is 25%, and your state tax rate is 5%. You elect to apply the 3.8% NIIT.
Adjusted basis = $250,000 + $20,000 − $45,000 = $225,000. Realized gain = $400,000 − $24,000 − $225,000 = $151,000. Recapture portion = min($45,000, $151,000) = $45,000. Capital gain portion = $151,000 − $45,000 = $106,000.
Recapture tax = $45,000 × 25% = $11,250. Capital gains tax = $106,000 × 15% = $15,900. NIIT = $151,000 × 3.8% = $5,738. State tax = $151,000 × 5% = $7,550. Total estimated tax deferred = $11,250 + $15,900 + $5,738 + $7,550 = $40,438. By completing a 1031 exchange, you defer that entire amount.
Frequently asked questions
What is a 1031 exchange?
A 1031 exchange is a tax-deferral strategy under Section 1031 of the Internal Revenue Code. It lets you sell an investment property and reinvest the proceeds into a like-kind property, deferring the capital gains tax. The tax is not eliminated — it carries over to the new property, reducing its basis — but you postpone paying it, often for years or decades.
What are the 1031 exchange deadlines?
You must identify replacement property within 45 days of closing the sale and complete the purchase within 180 days. The new property must be of equal or greater value to defer all the tax. A qualified intermediary must hold the funds — you cannot touch the cash between the sale and the purchase.
What is depreciation recapture in a 1031 exchange?
When you sell a rental property, the depreciation you took over the years is subject to recapture — taxed at a special rate (capped at 25% federally for real property). In a 1031 exchange, the recapture tax is deferred along with the capital gains tax, but the recaptured amount reduces the basis of the replacement property.
What is the Net Investment Income Tax (NIIT)?
The NIIT is a 3.8% surtax on investment income that applies to taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). It applies to capital gains from real estate sales. The calculator lets you elect to apply it if your income level makes it relevant.
Can I do a 1031 exchange on my primary residence?
No. A 1031 exchange applies only to investment or business property, not personal residences. If you are selling your primary residence, you may qualify for the Section 121 exclusion (up to $250,000 for singles or $500,000 for married couples) instead. Use the Capital Gains Tax Calculator for that scenario.
More Taxes tools
- Capital Gains Tax Calculator Estimate capital gains tax, recapture, and net proceeds when you sell a property.
- Rental Property Depreciation Calculator Calculate annual and first-year depreciation with the mid-month convention.
- Depreciation Recapture Calculator Estimate depreciation recapture tax when you sell a rental property.