How does a 1031 exchange work?

You sell investment property, a qualified intermediary holds the proceeds (you may never touch them), you identify replacement property within 45 days, and you close within 180. Do it right and the gain and depreciation recapture roll into the new property's basis instead of being taxed, deferring the full federal bill.

What is depreciation recapture and why is it 25 percent?

Depreciation deductions reduce your basis, so at sale they resurface as gain. For real property depreciated straight-line, that slice is unrecaptured Section 1250 gain, taxed at ordinary rates capped at 25 percent, above the 15 or 20 percent that applies to appreciation. On long-held rentals it is often the largest part of the bill.

What is boot in a 1031 exchange?

Anything you receive that is not like-kind property: cash you keep, or debt relief when the new mortgage is smaller than the old one. Boot is taxable up to your gain even when the rest of the exchange succeeds, which is why full deferral means equal-or-up on both price and debt.

What are the 45-day and 180-day rules?

From the day your sale closes, you have 45 calendar days to identify replacement property in writing (commonly up to three candidates) and 180 days total to close on one of them. The clocks run together, include weekends and holidays, and have essentially no extensions; missing either collapses the exchange into a taxable sale.

Do I ever pay the deferred tax?

The deferred gain carries into the replacement property's reduced basis, so a later taxable sale pays it then, unless you exchange again, or hold until death, where current law steps up the basis for heirs and the deferred gain is never taxed. That swap-till-you-drop pattern is why serious real estate investors treat 1031s as a cornerstone.

1031 Exchange Calculator

See the tax a 1031 exchange defers on an investment property sale: 25% depreciation recapture, capital gains, and NIIT, plus the reinvestment bar for deferral.

X f in

Tax deferred by exchanging

$58,212.00

Realized gain: $284,000.00
Adjusted basis: $280,000.00
Net sale price: $564,000.00
Unrecaptured depreciation: $90,000.00
Recapture tax (25%): $22,500.00
Capital gains tax: $29,100.00
Net investment income tax (3.8%): $6,612.00
Net proceeds if sold without exchanging: $505,788.00
For full deferral: Full deferral requires replacement property priced at least $564,000 (your net sale price) with all of the proceeds reinvested; any cash or debt relief you keep is taxable boot. Identify candidates within 45 days and close within 180.

Quick answer: With the example inputs this page loads by default, the headline result (Tax deferred by exchanging) comes to $58,212.00. See the tax a 1031 exchange defers on an investment property sale: 25% depreciation recapture, capital gains, and NIIT, plus the reinvestment bar for deferral. Change any input above and every figure updates instantly in your browser.

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A 1031 exchange lets you sell investment real estate and roll the proceeds into replacement property without paying tax now, deferring three layers: 25 percent on the depreciation you have claimed (unrecaptured Section 1250 gain), 15 or 20 percent capital gains on the rest, and the 3.8 percent net investment income tax. This calculator computes exactly what a taxable sale would owe, which is what the exchange defers.

What this result means

The deferred-tax figure is the exchange's value, and depreciation is usually why it is bigger than sellers expect: every dollar of depreciation claimed comes back at 25 percent, often before any appreciation is taxed at all. Against that saving weigh the constraints: 45 days to identify replacements, 180 to close, a qualified intermediary who must hold the money, and equal-or-up reinvestment, since any cash kept is taxable boot. Deferral compounds: basis carries over, and heirs currently receive a stepped-up basis that can erase the deferred gain entirely. State taxes add on top. Not tax advice; exchanges run through professionals.

Assumptions

Adjusted basis is purchase price plus capital improvements minus depreciation claimed, and the realized gain is the net sale price (after selling costs) over that basis. The tax shown is what a fully taxable sale would owe federally, which is precisely what a fully deferred exchange postpones.
The depreciation-driven slice of the gain (unrecaptured Section 1250 gain, for straight-line depreciation on real property) is modeled at a flat 25 percent; the statute taxes it at ordinary rates capped at 25 percent, so filers below the 25 percent bracket would owe slightly less than shown.
The remaining gain stacks on top of your other taxable income through the 0/15/20 percent long-term brackets (the same shared engine as the capital gains calculator), assuming more than a year of ownership, and the 3.8 percent net investment income tax applies to the whole gain above the statutory MAGI threshold.
Full deferral under IRC 1031 requires like-kind real property held for investment or business use, a qualified intermediary, identification of replacements within 45 days, closing within 180 days, and reinvestment of all proceeds into property of equal or greater value with equal or greater debt; anything kept is taxable boot, which this all-or-nothing model does not prorate.
State income tax on the gain, partial exchanges, related-party rules, and personal-use property (excluded from 1031 since 2018) are not modeled. Primary homes use the Section 121 exclusion instead (the home sale calculator).
This is an estimate for educational purposes only, not tax or legal advice. Exchanges have strict deadlines and run through qualified intermediaries.

Key terms

Definitions for the terms this calculator uses, in our finance glossary .

How it works

The exchange’s value is the tax bill it postpones, so the calculator prices a plain taxable sale.

The gain. Adjusted basis = purchase price + capital improvements - depreciation claimed. Amount realized = sale price - selling costs. The realized gain is the difference, and depreciation is the quiet driver: every dollar deducted over the years lowered the basis and resurfaces in the gain.

Three tax layers on a taxable sale.

Unrecaptured Section 1250 gain: the depreciation-driven slice, taxed at ordinary rates capped at 25 percent (modeled flat at 25).
Long-term capital gains: the remainder stacks on top of your other taxable income through the 0/15/20 percent brackets, the same shared engine as the capital gains calculator.
Net investment income tax: 3.8 percent on the gain above the $200,000/$250,000 MAGI threshold.

A fully compliant 1031 exchange (like-kind investment real estate, qualified intermediary, 45-day identification, 180-day closing, equal-or-up reinvestment of price and debt) defers all three, carrying the basis into the replacement property.

Worked example

A rental bought for $350,000 with $20,000 of improvements and $90,000 of depreciation, sold for $600,000 with $36,000 of costs, by a single filer with $90,000 of other income.

Basis: $280,000. Amount realized: $564,000. Gain: $284,000.
Recapture: $90,000 x 25% = $22,500.
Capital gains: $194,000, all in the 15% band above $90,000 of income = $29,100.
NIIT: 3.8% x $174,000 (MAGI $374,000 over the $200,000 threshold) = $6,612.
Total deferred: $58,212, about 10 percent of the sale price.

Scope and limitations

All-or-nothing deferral (partial exchanges and boot proration are not computed), flat 25 percent on the recapture slice, federal only (states tax the gain too, and California claws back deferred gain on out-of-state replacements), no Section 1250 accelerated-depreciation ordinary recapture (rare post-1986), and no primary residences (Section 121 handles those). This is an estimate for education, not tax or legal advice; exchanges run on strict deadlines through qualified intermediaries.

Sources

Frequently asked questions

How does a 1031 exchange work?: You sell investment property, a qualified intermediary holds the proceeds (you may never touch them), you identify replacement property within 45 days, and you close within 180. Do it right and the gain and depreciation recapture roll into the new property's basis instead of being taxed, deferring the full federal bill.
What is depreciation recapture and why is it 25 percent?: Depreciation deductions reduce your basis, so at sale they resurface as gain. For real property depreciated straight-line, that slice is unrecaptured Section 1250 gain, taxed at ordinary rates capped at 25 percent, above the 15 or 20 percent that applies to appreciation. On long-held rentals it is often the largest part of the bill.
What is boot in a 1031 exchange?: Anything you receive that is not like-kind property: cash you keep, or debt relief when the new mortgage is smaller than the old one. Boot is taxable up to your gain even when the rest of the exchange succeeds, which is why full deferral means equal-or-up on both price and debt.
What are the 45-day and 180-day rules?: From the day your sale closes, you have 45 calendar days to identify replacement property in writing (commonly up to three candidates) and 180 days total to close on one of them. The clocks run together, include weekends and holidays, and have essentially no extensions; missing either collapses the exchange into a taxable sale.
Do I ever pay the deferred tax?: The deferred gain carries into the replacement property's reduced basis, so a later taxable sale pays it then, unless you exchange again, or hold until death, where current law steps up the basis for heirs and the deferred gain is never taxed. That swap-till-you-drop pattern is why serious real estate investors treat 1031s as a cornerstone.

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By Sam Sage Last reviewed July 2026.