1031 Exchange

Named for IRC Section 1031, the exchange defers three tax layers at once: 15 or 20 percent long-term capital gains, the 25 percent unrecaptured depreciation charge, and the 3.8 percent net investment income tax. The mechanics are unforgiving: a qualified intermediary must hold the sale proceeds (touching the cash disqualifies the exchange), replacement property must be identified in writing within 45 days of closing, the purchase must close within 180, and full deferral requires equal-or-greater value and debt, since anything kept is taxable boot.

Since 2018 only real property qualifies, and only when held for investment or business use. The deferred gain does not vanish; it carries into the replacement property’s reduced basis, to be taxed at a future sale, deferred again, or, under current law, erased for heirs by the step-up at death. The 1031 exchange calculator prices exactly what a taxable sale would owe, which is what the exchange defers.