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1031 Exchange

How much tax can you defer by trading up?

See the tax you’d owe selling a rental normally, and how much of it you could put off by reinvesting in another investment property instead. You’ll need what you paid, what you’ve improved and depreciated, the expected sale price, and the price of the property you’d buy next.

  1. Selling a rental usually means a tax bill

    Your taxable profit is the sale price, minus selling costs, minus your (what you paid plus improvements, minus the you’ve deducted). Part is taxed as , the rest as .

  2. A 1031 exchange puts that tax off

    With a , a holds your sale money and buys another investment property with it. You owe no tax this year. The old gain carries into the new property, to be taxed when you sell that one.

  3. Trade equal or up to defer all of it

    To defer everything, the new property must cost at least your net sale price (sale price minus selling costs). Any shortfall is called and is taxed now. We compare a normal sale with the exchange.
The defaults are an example rental. For your own depreciation total, add up the depreciation lines on your past Schedule E forms or ask your tax preparer. Before a real exchange, read 1031 exchange step by step.
Property you’re selling

The rental or investment property you plan to sell. Your purchase records and past tax returns have most of these numbers.

$
$
$
$
% of price
$
Your tax rates

Used to estimate the tax on a normal sale. If you’re unsure, your last tax return or tax preparer can tell you your bracket.

%
%

Extra 3.8% tax (NIIT)?

Income over $200k single / $250k married

Property you’ll buy

The replacement property. It must also be held for investment or business.

$

Tax you put off with a 1031

$138,624

Out of $138,624 you would owe on a normal sale. None is due this year.

Sale price

$850,000

Selling costs

$59,500

7% for commission and closing

Your tax cost (adjusted basis)

$330,000

price + improvements − depreciation

Taxable profit (gain)

$460,500

net sale − adjusted basis

Gain from depreciation (recapture)

$120,000

taxed at up to 25% (this tool uses 25%) + 3.8% NIIT

Rest of the gain (long-term)

$340,500

taxed at 20% + 3.8% NIIT

Tax if you sell normally

$138,624

federal + state + recapture

Tax put off by the 1031

$138,624

owed later, when you sell without exchanging

What this means

Selling normally, you’d owe about $138,624 on a $460,500 gain: $34,560 on the depreciation portion, $81,039 in federal capital gains tax, and $23,025 in state tax. Because the $1,000,000 replacement costs at least your $790,500 net sale price, an exchange defers all of it. After paying off the mortgage, you’d have $590,500 to reinvest instead of $451,876 after tax. At 25% down, that extra cash could support about $554,496 more property.

The deferred gain carries into the new property and is taxed when you eventually sell without another exchange, unless your heirs inherit it with a . The buying-power figure is a rough illustration that assumes 25% down.

The rules that make or break an exchange

You sell investment property and defer the capital gains and depreciation recapture taxes by reinvesting the proceeds in investment property. For real estate, like-kind is broad: almost any US real estate held for investment or business qualifies (residential rental, commercial, raw land, and so on).

The two deadlines (strict, no extensions):
• 45 days after the sale to identify the replacement property in writing
• 180 days after the sale to close on the replacement (or your tax return due date, including extensions, if that comes first)

The proceeds must go directly to a . If you receive the cash, even briefly, the exchange fails.

To defer all the tax, the replacement price must be at least the net sale price (sale price minus selling costs), you must reinvest all the exchange cash, and the debt paid off at sale must be replaced, either with a new mortgage or with extra cash you add. (Added cash can offset debt relief, but new debt can’t offset cash you take out.) Anything less is , taxable to that extent. The math above assumes all the QI cash goes into the replacement, so total boot is how far the replacement price falls short of the net sale price.

If you keep exchanging until death, your heirs inherit at market value with a stepped-up basis, and the deferred gain is never taxed. That’s why some investors do exchange after exchange.

QI fees usually run $1,000 to $2,500. Hire a QI that specializes in 1031s, and work with a CPA. A failed exchange makes the full gain taxable in the year of sale.

Not included: cash held back from the QI (cash boot beyond the price shortfall), replacement closing costs, reverse exchanges, build-to-suit exchanges, related-party rules, the foreign property exclusion, and vacation home rules. Full step-by-step guide
Sale price $850,000 selling costs $59,500 Net sale price $790,500 taxed as recapture taxed as capital gain Adjusted basis $330,000 $120,000 $340,500 price paid + improvements $450,000 depreciation To defer all of it, the replacement must cost at least $790,500 Spend less and the shortfall is boot, taxed now, recapture first
Depreciation you deducted lowers your basis, and that same $120,000 comes back as the part of the gain taxed as recapture. The dashed line is your net sale price, the least the replacement can cost if you want to defer all the tax. Numbers are the calculator’s starting example.

Results are estimates based on your inputs and the assumptions on this page, not quotes or advice. A lender, servicer, or tax advisor will give you different numbers. Disclaimer

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Terms used on this page

The tax terms behind a 1031 exchange, as this calculator uses them.

1031 exchange
A tax rule that lets you sell an investment property and put off the tax on your profit by reinvesting the proceeds in another investment property. It doesn’t apply to your own home.
Capital gain
Your profit on a sale: the sale price minus selling costs, minus your adjusted basis. Long-term gains (property held over a year) are taxed federally at 0%, 15%, or 20%.
Adjusted basis
What the IRS counts as your investment: the purchase price plus improvements, minus the depreciation you’ve deducted. A lower basis means a bigger taxable gain. More
Depreciation
A yearly tax deduction for wear and tear on a rental building, spread over 27.5 years for residential property. It lowers your taxes while you own the property and lowers your basis.
Depreciation recapture
The part of your gain that comes from depreciation you deducted. On a normal sale it’s taxed at up to 25% federal. A 1031 exchange defers it along with the rest of the gain.
Qualified intermediary (QI)
The independent firm that holds your sale money and buys the replacement for you. If you touch the cash, even briefly, the exchange fails. Fees usually run $1,000 to $2,500.
Boot
Anything you get from an exchange that isn’t replacement property, such as cash you keep or a smaller mortgage. Boot is taxed in the year of the exchange, up to your gain.
Like-kind property
The rule that the replacement must be the same general kind as what you sold. For US real estate held for investment, nearly any property qualifies for any other.
NIIT (net investment income tax)
An extra 3.8% federal tax on investment income, including gains from selling a rental, when modified AGI is above $200,000 single or $250,000 married filing jointly. More
Stepped-up basis
When heirs inherit property, its basis generally resets to market value at the owner’s death, so gain deferred through 1031 exchanges goes untaxed.

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