1031 Exchange Calculator
See exactly how much capital gains tax and depreciation recapture you'd owe on a sale — and how much you save by rolling the proceeds into a 1031 exchange.
What a 1031 exchange actually does
A 1031 exchange (named after IRS Section 1031) lets you sell an investment property and roll the proceeds into another "like-kind" property without paying capital gains tax or depreciation recapture at the time of sale. The tax doesn't disappear — it's deferred, potentially indefinitely. If you keep exchanging into new properties and never cash out, you can defer the gain forever. If you die owning the property, your heirs inherit it at a stepped-up basis and the deferred tax evaporates entirely.
It's the single biggest tax tool available to real estate investors — and it's exclusive to investment property (your primary residence doesn't qualify; that has its own $250K/$500K exclusion).
What gets taxed on a normal sale
Without a 1031, two different taxes hit when you sell:
- Long-term capital gains tax (0%, 15%, or 20% federal) on the appreciation above your adjusted basis.
- Depreciation recapture tax (up to 25% federal) on every dollar of depreciation you took during ownership. This is the brutal one — it catches investors by surprise.
- State capital gains tax on top of federal. Varies from 0% (Florida, Texas) to 13.3% (California).
- NIIT (3.8%) if your AGI exceeds $200K single / $250K married filing jointly.
Total gain = Net sale proceeds − Adjusted basis
You sell a rental for $650,000. Selling costs are $39,000. You paid $320,000 originally, made $35,000 in capital improvements, and have taken $68,000 in depreciation. You're at the 15% federal LTCG bracket, in a state with 5% capital gains tax, and NIIT applies.
The depreciation portion ($68,000) gets recaptured at 25%:
The remaining gain ($256,000) is taxed as long-term capital gains:
A 1031 exchange defers all $83,912 — that money stays invested in the replacement property, compounding for you instead of leaving for the IRS.
The 1031 rules you must follow
1031 exchanges have strict procedural rules. Missing any of them invalidates the exchange.
- 45-day identification period. You have 45 days from the sale closing to formally identify potential replacement properties in writing.
- 180-day exchange period. You have 180 days from sale closing to actually close on at least one of the identified replacement properties.
- Qualified Intermediary required. You can never touch the sale proceeds. The money flows through a Qualified Intermediary (QI) — a third-party accommodator who holds funds and facilitates the closing.
- Like-kind property. Any US investment real estate qualifies as like-kind to any other US investment real estate. A duplex can exchange to a strip mall, an apartment, raw land, etc. Foreign property is NOT like-kind.
- Equal or greater value. The replacement property must equal or exceed the relinquished property's value (and equity, and debt). If you trade down, the difference is "boot" and gets taxed.
- Same taxpayer. The same entity that sold must buy. If you sold as John Smith, you can't buy as John Smith LLC.
Common 1031 mistakes
- Receiving any cash from the sale. Even briefly. The money must flow QI → escrow, never through your hands or your bank account.
- Forgetting boot. If you exchange a $650K property for a $500K one, the $150K "trade down" is taxable.
- Missing the 45-day window. Three properties is the standard cap on what you can identify, but specific rules apply. Be conservative.
- Trying to 1031 a flip. Property held primarily for resale (a flip) doesn't qualify — only property held for investment or productive use in business.
- Using the wrong QI. A bad or insolvent QI can disappear with your money or fail to execute correctly. Use established firms.
Frequently asked questions
How long do I have to hold a property before I can 1031 it?
The IRS doesn't specify a minimum holding period, but the property must be held for "investment or productive use" — not for immediate resale. Most tax advisors recommend at least 12-24 months to clearly establish investment intent. Flips don't qualify.
Can I 1031 into a property I want to live in?
Not initially. The replacement must be investment property at acquisition. After holding it as a rental for at least 2 years (most CPAs say longer to be safe), you can convert it to your primary residence — and after living there 2+ years, sell with partial Section 121 exclusion benefits. There are specific safe harbor rules.
What's a Delaware Statutory Trust (DST)?
A DST is a passive replacement property option — you buy fractional ownership in an institutionally-managed property. Useful when you can't find a direct replacement in your 45/180 windows or want to step away from active management. They're fully 1031-eligible.
What happens when I die owning a property bought via 1031?
This is the strategy's killer feature: your heirs inherit the property at a stepped-up basis equal to fair market value at death. All the deferred gain disappears completely. Tax savings from a lifetime of exchanges become permanent at that moment.
How much does a 1031 exchange cost?
QI fees typically run $750-$1,500 for straightforward exchanges, more for complex multi-property structures. Tiny relative to the deferred tax — almost always worth it.
1031 exchanges have strict procedural rules and significant complexity. The numbers here are estimates and ignore certain edge cases. Always engage a qualified tax advisor and an experienced QI before executing an exchange. Tax laws change.