1031 Exchange Calculator: How to Defer Capital Gains on Real Estate

A property bought for $200,000 and sold for $500,000 has $300,000 in capital gains. At 20% long-term capital gains rate plus 3.8% NIIT, the tax bill is $71,400. A 1031 exchange lets you roll that $500,000 into a new investment property and defer the entire tax.

The deferred tax is not forgiven. It follows the new property. But you can keep deferring through multiple exchanges for your entire investing career, and heirs receive a step-up in basis at death, potentially eliminating the deferred tax entirely.

The Tax Without a 1031 Exchange

$200,000 purchase price, sold for $500,000:

| Tax Component | Amount | |--------------|--------| | Sales price | $500,000 | | Adjusted basis | $200,000 | | Capital gain | $300,000 | | Federal capital gains tax (20%) | $60,000 | | Net Investment Income Tax (3.8%) | $11,400 | | State capital gains (assume 5%) | $15,000 | | Total tax | $86,400 | | Net to reinvest | $413,600 |

With a 1031 exchange, you reinvest the full $500,000. The $86,400 stays compounding for you.

How Much the Deferral Is Worth

Reinvesting $500,000 vs. $413,600 at 7% for 20 years:

| Scenario | Starting Amount | Value at Year 20 | |----------|----------------|-----------------| | 1031 exchange | $500,000 | $1,934,842 | | Taxable sale | $413,600 | $1,600,728 | | Advantage of 1031 | | $334,114 |

The deferred $86,400 generates $334,000 in additional wealth over 20 years. The longer the holding period, the larger this gap grows.

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The 1031 Exchange Rules

The IRS requirements are strict. Missing any deadline disqualifies the exchange:

| Requirement | Rule | |-------------|------| | Like-kind property | Any investment real estate (residential to commercial, land to apartment, all qualify) | | 45-day identification | Identify replacement property within 45 days of closing the sale | | 180-day closing | Close on replacement property within 180 days of selling | | Equal or greater value | Replacement must equal or exceed relinquished property value to defer all tax | | Qualified intermediary | Must use a QI — you cannot touch the money | | Primary residence | Does not qualify |

Boot is any cash or non-like-kind property received in the exchange. If you pocket $50,000 from proceeds, that $50,000 is taxable even within a 1031.

The 45-Day Identification Rule

Within 45 days of selling, you must identify replacement properties in writing to your qualified intermediary. Three rules govern this:

1. 3-property rule: Identify up to 3 properties of any value (most common)
2. 200% rule: Identify any number of properties if their total value does not exceed 200% of the sold property
3. 95% rule: Identify any number if you actually acquire 95% of the total identified value

The 45-day clock starts the day the sale closes, not when you list the property. In a competitive market, 45 days goes fast.

Depreciation Recapture

Even with a 1031 exchange, depreciation recapture is deferred, not eliminated. When you eventually sell without exchanging, accumulated depreciation is taxed at 25%. The 1031 pushes that tax bill forward but does not eliminate it unless you hold until death and your heirs receive a stepped-up basis.

Costs of a 1031 Exchange

| Cost Item | Typical Range | |-----------|--------------| | Qualified Intermediary fee | $750-$1,500 | | Exchange accommodation (reverse) | $5,000-$10,000 | | Identification deadline management | Included in QI fee |

The QI fee is small relative to the tax deferral. On $86,400 in deferred taxes, a $1,500 QI fee is a 1.7% cost of the benefit.

Use the CalcMoney Capital Gains Calculator to model your specific tax liability and compare the 1031 exchange benefit for your property.

Frequently Asked Questions

Can I do a 1031 exchange on a house I sometimes rent out?

Properties with mixed personal and investment use require analysis of how the property was used in the two years before the sale. A property rented at least 14 days per year and used personally no more than 14 days generally qualifies. A vacation home used primarily for personal use does not.

What is a qualified intermediary?

A QI is a third party who holds your sale proceeds during the exchange. You cannot take possession of the funds without voiding the exchange. Choose a QI with exchange experience, errors and omissions insurance, and funds held in segregated accounts. The Federation of Exchange Accommodators provides referrals.

Does a 1031 exchange work for property outside the US?

No. US and foreign property are not like-kind. Since 2018, personal property (equipment, vehicles, artwork) no longer qualifies. Only real property held for investment or business use qualifies.