1031 Exchange Tax Savings Calculator
Estimate the capital gains taxes you defer by using a 1031 like-kind exchange instead of selling outright. Use it when evaluating whether to sell an investment property or roll proceeds into a replacement property.
About this calculator
When you sell investment real estate, you owe capital gains tax plus depreciation recapture tax. This calculator estimates your total deferred tax liability using: Tax = ((Sale Price − Original Basis − Depreciation) × Capital Gains Rate) + (Depreciation × 0.25) + ((Sale Price − Original Basis − Depreciation) × (State Rate / 100)). The first term is federal long-term capital gains tax on your net gain. The second term is depreciation recapture tax, which the IRS levies at a maximum 25% rate on all depreciation previously claimed. The third term is state capital gains tax. Under IRC Section 1031, exchanging into a like-kind property defers all three components, allowing the full sale proceeds to compound in a new investment rather than being reduced by taxes at sale.
How to use
You sell a rental property for $600,000. Your original basis was $250,000 and you claimed $80,000 in depreciation. Your net gain = $600,000 − $250,000 − $80,000 = $270,000. Federal capital gains tax (15% bracket): $270,000 × 0.15 = $40,500. Depreciation recapture: $80,000 × 0.25 = $20,000. State tax at 5%: $270,000 × 0.05 = $13,500. Total deferred tax = $40,500 + $20,000 + $13,500 = $74,000. By completing a 1031 exchange you keep the full $600,000 working in your next investment instead of writing a $74,000 check to the IRS.
Frequently asked questions
What are the key rules and deadlines for completing a 1031 exchange?
Under IRS rules, you must identify potential replacement properties within 45 calendar days of closing on your relinquished property. You then have 180 calendar days from that same closing date to complete the purchase of the replacement property. The replacement property must be of 'like-kind' — broadly, any U.S. investment or business real property qualifies. You must also reinvest all net equity into the new property and use a qualified intermediary to hold the sale proceeds; touching the money yourself disqualifies the exchange.
How is depreciation recapture taxed differently from capital gains in a property sale?
Long-term capital gains on investment property are taxed at preferential rates of 0%, 15%, or 20% depending on your income. Depreciation recapture, however, is taxed at a flat maximum rate of 25% under IRC Section 1250, regardless of your capital gains bracket. This means the portion of your gain attributable to depreciation you previously deducted is taxed more heavily than the remaining appreciation. For long-held properties with significant depreciation, recapture can represent the largest single tax bill at sale, making deferral via a 1031 exchange especially valuable.
What happens to the deferred taxes from a 1031 exchange when I eventually sell the replacement property?
Deferred taxes are not forgiven — they carry forward through your adjusted basis in the replacement property. Your basis in the new property is reduced by the gain you deferred, meaning more gain is recognized when you eventually sell. However, investors can continue rolling deferred taxes forward through successive 1031 exchanges indefinitely. If you hold the replacement property until death, your heirs receive a stepped-up basis equal to its fair market value at that time, potentially eliminating the deferred tax liability entirely.