1031 Exchange Calculator

How this 1031 exchange calculator works

A 1031 exchange (also called a like-kind exchange) lets you sell one investment or business property and reinvest the proceeds into another investment property while deferring capital gains and depreciation recapture taxes. This calculator compares:

• A taxable sale with no 1031 exchange, and
• A 1031 exchange where you roll your equity into a replacement property.

Key steps and formulas

1. Adjusted basis of the relinquished property

The adjusted basis is your tax cost in the property after accounting for improvements and depreciation. Depreciation reduces basis and increases potential taxable gain.

2. Amount realized and realized gain

Realized gain is the total economic gain on the sale before considering whether it is currently taxable or deferred via a 1031 exchange.

3. Depreciation recapture vs. capital gain

Under current U.S. rules, depreciation recapture on real property is generally taxed at up to 25%, while the remaining long-term capital gain is taxed at your long-term capital gains rate.

4. Boot in a 1031 exchange

In a 1031 exchange, you can defer tax on the gain except for any boot you receive. Boot is anything that is not like-kind real property, such as:

• Cash boot – cash you receive or keep from the sale proceeds.
• Mortgage boot (debt relief) – if your debt on the replacement property is less than the debt you paid off on the relinquished property.

The calculator caps recognized gain at the smaller of your realized gain and total boot, which is a common simplifying assumption:

5. Basis in the replacement property

In a 1031 exchange, your basis in the replacement property is not simply its purchase price. Instead, it is reduced by the deferred gain:

This lower basis means that when you eventually sell the replacement property without doing another 1031 exchange, you may owe tax on the previously deferred gain.

Interpreting the results

• Total immediate tax (no 1031) – estimated tax bill if you sell and do not use a 1031 exchange.
• Estimated tax due now (with 1031) – tax on any recognized gain (boot) in the exchange.
• Estimated tax deferred – difference between the two scenarios; a rough estimate of tax you are pushing into the future.
• Basis in replacement property – starting point for future depreciation and gain calculations.

What is a 1031 exchange?

A 1031 exchange is a transaction under Internal Revenue Code Section 1031 that allows you to defer capital gains and depreciation recapture taxes when you exchange one investment or business property for another of like-kind. Key points:

• Applies to real property held for investment or business use, not personal residences.
• Since 2018, Section 1031 applies only to real estate, not personal property.
• You must use a qualified intermediary (QI) to hold the proceeds; you cannot take constructive receipt of the cash.
• Strict timelines apply: 45 days to identify replacement property and 180 days to close.
• You can exchange into one or multiple properties, subject to IRS identification rules (3-property rule, 200% rule, etc.).

Basic 1031 exchange requirements

1. Like-kind real property – both relinquished and replacement properties must be in the U.S. and held for investment or business.
2. Equal or greater value – to fully defer tax, you generally must:
   • Buy replacement property of equal or greater value than the relinquished property, and
   • Reinvest all net equity, and
   • Take on equal or greater debt (or add cash to offset any reduction in debt).
3. Proper use of a qualified intermediary – the QI structures the exchange and holds the funds.
4. Timely identification and closing – 45-day identification period and 180-day exchange period.
5. Correct reporting – the exchange is reported on IRS Form 8824 with your tax return.

Common 1031 exchange strategies

• Trading up – moving from a smaller property to a larger or higher-income property.
• Consolidation – exchanging multiple smaller properties into one larger asset.
• Diversification – exchanging one property into several in different markets or asset types.
• Management relief – moving from active management (e.g., small rentals) into more passive investments (e.g., triple-net leases or DSTs).

Limitations and risks

• Complex rules – mistakes in timing, identification, or handling of funds can disqualify the exchange.
• Reduced flexibility – you may feel pressure to buy a property quickly to meet deadlines, which can affect investment quality.
• Basis carryover – tax is deferred, not forgiven (unless potentially eliminated by a step-up in basis at death under current law).
• State-specific rules – some states have additional requirements or clawback provisions.

Frequently asked questions about 1031 exchanges

Can I take some cash out and still do a 1031 exchange?

Yes. You can receive some cash or reduce your debt and still complete a 1031 exchange. However, the cash or debt relief is usually treated as boot and may be taxable up to the amount of your realized gain. The calculator estimates how much of your gain might be recognized now versus deferred.

What happens if I can’t find a replacement property in 45 days?

If you fail to properly identify replacement property within 45 days, the exchange generally fails and the transaction is treated as a taxable sale. Your qualified intermediary will typically release the funds after the 45/180-day periods, and you will owe tax on the gain.

Can I exchange between different types of real estate?

Yes. Under the broad like-kind standard for real property, you can generally exchange, for example, an apartment building for raw land, or a warehouse for a retail center, as long as both are held for investment or business use and are located in the United States.

Is this calculator accurate for my specific situation?

This tool uses simplified assumptions and user-specified tax rates. It does not account for all nuances such as passive activity rules, at-risk limitations, installment sales, partnership interests, or state-specific quirks. Use it as a planning aid, not as a substitute for personalized advice from a CPA, tax attorney, or 1031 specialist.