Selling an investment property triggers capital gains and depreciation recapture tax. A 1031 exchange defers that tax by rolling the full proceeds into a new property. See how much that deferral is worth over time.
When you sell an investment property for more than its adjusted basis, you generally owe two kinds of federal tax: depreciation recapture on the amount you previously deducted, and capital gains tax on the remaining profit. A 1031 exchange, named for the relevant section of the tax code, lets you defer both by rolling the full proceeds into a new like kind investment property instead of cashing out. This calculator compares selling outright and paying the tax now against exchanging and reinvesting the full amount. Every slider on this page has a matching number field: drag to explore, or type exact figures if you already know your numbers.
Your adjusted basis equals your original purchase price minus any depreciation you claimed. Your total gain is the sale price minus that adjusted basis. The portion of the gain equal to your depreciation is taxed as depreciation recapture, generally at a rate up to 25 percent federally, while any remaining gain is taxed at capital gains rates. This calculator applies your recapture rate to the depreciation first, then applies your combined capital gains rate to whatever gain remains.
A 1031 exchange does not erase the tax bill. It postpones it, and your adjusted basis carries over into the new property, meaning the deferred gain is still embedded and would be taxed if you eventually sold without exchanging again. The financial benefit shown in this calculator comes entirely from having more capital working and compounding in the meantime, not from avoiding the tax altogether. Some investors continue exchanging property after property for the rest of their lives, a strategy sometimes summarized as swap until you drop, since a step up in basis at death can eliminate the deferred gain for heirs under current law.
This tool does not model the strict 1031 timing rules, which require identifying a replacement property within 45 days of the sale and closing within 180 days, the use of a qualified intermediary to hold funds, or the requirement that the replacement property be of equal or greater value to fully defer the gain. It also assumes both strategies earn the same return going forward, when the specific replacement property chosen in an exchange could perform quite differently than a diversified reinvestment.
1031 exchanges, adjusted basis, and depreciation recapture are core tax content on real estate licensing exams. Our General Real Estate practice exam covers this directly, with state specific versions for California, New York, New Jersey, and Pennsylvania. This same tax deferral concept also appears in the tax planning content on the CFP exam.
The like kind requirement for real estate is broader than many people expect. Nearly any type of real property held for investment or business use can generally be exchanged for any other, such as an apartment building for raw land, as long as both are held for investment or business purposes rather than personal use.
Any cash or value you keep out of the exchange, often called boot, is generally taxable in the year of the exchange, even if the rest of the transaction qualifies for deferral. To fully defer the gain, the replacement property generally needs to be of equal or greater value with all proceeds reinvested.
No. Section 1031 exchanges apply only to property held for investment or business use, not personal residences. A separate provision allows an exclusion of gain on the sale of a primary residence up to certain limits, which works differently from a 1031 exchange.
Yes. Each slider has a paired number input. Type directly into any gold field to enter a precise figure, and the slider along with all results update immediately.
1031 exchange math shows up directly on real estate licensing exams. Practice for free.
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