1031 Exchange
How much tax can you defer by trading up?
NIIT applies (3.8%)
MAGI > $200k single / $250k MFJ
Tax you defer with a 1031
$134,064
That’s the tax bill you’d owe on a straight sale of this property. Doing a 1031 lets you push it to a future sale (or never, if you hold to death, heirs get stepped-up basis). With a 1031, you have $590,500 available to invest vs $456,436 after-tax, a buying-power difference of $536,256 at typical investor leverage (75% LTV).
Sale price
$850,000
Selling costs
$59,500
7% commissions/closing
Adjusted basis
$330,000
cost + improvements − depreciation
Total taxable gain
$460,500
before any deferral
Depreciation recapture
$120,000
taxed @ max 25%
Remaining LTCG
$340,500
taxed @ 20% + 3.8% NIIT
Total tax (no exchange)
$134,064
fed + state + recapture
Tax deferred via 1031
$134,064
pushed to future sale
How a 1031 exchange actually works
The basics: sell investment property, defer the cap gains and depreciation recapture taxes by reinvesting proceeds in like-kind investment property. "Like-kind" is broadly interpreted. Almost any US real estate held for investment/business qualifies (residential rental, commercial, raw land, etc.).
The two deadlines (strict, no extensions):
• 45 days after sale to identify replacement property in writing
• 180 days after sale to close on the replacement
You can’t touch the money: proceeds must go directly to a Qualified Intermediary (QI). If you receive cash, even briefly, you blow the exchange.
Trade equal or up: replacement must be ≥ sale price AND replacement mortgage ≥ relinquished mortgage AND reinvest all cash. Anything less = "boot" = taxable to that extent.
Heirs get stepped-up basis: the holy grail of 1031s. If you keep exchanging until death, your heirs inherit at fair market value, wiping out all deferred gain. This is why some investors do exchange after exchange.
Costs: QI fees ($1,000-2,500). Hire a 1031-experienced QI; never self-direct. Also work with a CPA. Getting it wrong = full taxation + penalties.
Doesn’t model: partial exchanges with boot, reverse exchanges, build-to-suit exchanges, related-party rules, foreign property exclusion, vacation home complexity. ALWAYS consult a 1031 QI and CPA before a real exchange.