1031 Exchange Estimator
Estimate the capital gains tax deferred by a like-kind 1031 exchange and compare tax owed vs. tax deferred when reinvesting in replacement property.
What this calculator does
This 1031 exchange estimator shows the size of the tax you can defer by rolling investment property proceeds into a replacement rather than cashing out. Enter your sale price, your adjusted cost basis, the capital gains rate that applies to you, and the value of the replacement property, and it returns the capital gain, the tax deferred, and any tax still owed.
The core rule is simple: a fully deferred exchange requires you to acquire replacement property of equal or greater value and reinvest all the proceeds. Buy cheaper, or take cash out, and the shortfall becomes boot — taxable now rather than later. The calculator makes that trade explicit so you can see exactly what buying down costs.
When to use it
Run it before you list, not after, because the mechanics have to be in place before closing. The number it produces — the tax you would owe on an outright sale — is the size of the interest-free loan a successful exchange gives you, and it is usually large enough to justify the qualified intermediary's fee several hundred times over.
It also quantifies the decision to buy down. If you want a smaller replacement property to reduce management burden, the calculator shows the tax bill that choice triggers on the difference. And it frames the exit question for a long-held rental: comparing the deferred tax against the hassle of another property helps decide whether to keep exchanging, convert to a Delaware Statutory Trust interest, or simply pay the tax and be done.
Understanding the inputs
Sale price is the gross contract price. Adjusted cost basis is the number people get wrong most often — it is your original purchase price plus capital improvements minus all depreciation claimed. Depreciation reduces basis, which is why a rental held for many years often has a far larger gain than the price difference suggests.
Capital gains rate should reflect your actual position. The long-term federal rate is 15 or 20 percent for most investors, plus 3.8 percent net investment income tax at higher incomes, plus state tax where applicable. Replacement property value is the purchase price of what you are buying — set it equal to or above the sale price for full deferral, and lower to see what partial deferral costs.
How is this calculated?
Capital Gain = Sale Price − Adjusted Basis. Tax Without Exchange = Gain × Rate. In a full 1031 exchange with equal/higher replacement property, tax is fully deferred.
A worked example
Take a rental sold for $1,150,000 with an adjusted basis of $620,000 after years of depreciation. The capital gain is $530,000. At a 20 percent rate, an outright sale triggers roughly $106,000 in federal capital gains tax, and once the 3.8 percent net investment income tax is added the figure is closer to $126,000 — before any state tax.
Buy a replacement at $1,250,000 and reinvest all proceeds, and the entire gain is deferred. Buy at $1,000,000 instead and you have $150,000 of value not reinvested, which is boot taxed in the year of the exchange — roughly $30,000 at 20 percent, or $35,700 including NIIT. That is the real cost of trading down, and it is why exchangers who want less property often add a second small purchase rather than accept the shortfall.
Limitations and assumptions
The biggest gap is depreciation recapture, which is not modeled here and is taxed at up to 25 percent separately from the capital gains rate. On a property held fifteen or twenty years, recapture can exceed the capital gains tax itself, so treat the deferred figure as understated. State tax is also excluded, and a handful of states impose clawback rules when you exchange out of state property.
The calculator assumes a clean, fully deferred exchange with equal or greater debt replaced. It does not model mortgage boot from taking on a smaller loan, partial exchanges, reverse or improvement exchanges, or the related-party rules that require a two-year holding period. Deadlines are absolute and the qualified intermediary must be engaged before closing. Involve a CPA and a QI at the point you decide to sell, not after the contract is signed.
Common Questions
- What are the 45 and 180 day deadlines?
- You have 45 calendar days from closing the sale to identify replacement property in writing, and 180 days to complete the purchase — or the due date of your tax return including extensions, whichever comes first. Neither is extendable for any reason short of a federally declared disaster. Miss either and the entire exchange fails.
- Do I need a qualified intermediary?
- Yes, and you must engage one before the sale closes. If proceeds touch your bank account, even briefly, the exchange is dead — this is called constructive receipt. The QI holds the funds and handles the documentation. They are unregulated in most states, so choose one with bonding, insurance, and segregated accounts.
- What are the identification rules?
- Three options. The three-property rule lets you name up to three properties of any value. The 200 percent rule lets you name any number provided their combined value is under twice what you sold. The 95 percent rule allows more still if you acquire at least 95 percent of the value identified.
- What is boot and why is it taxed?
- Any value you receive that is not like-kind property — cash left over, or a reduction in mortgage debt. If you sell for $1,150,000 with a $400,000 loan and buy for $1,000,000 with a $300,000 loan, you have $150,000 of cash boot and $100,000 of mortgage boot, both taxable in the year of the exchange.
- Does this include depreciation recapture?
- No, and it is a significant omission. Depreciation claimed on the property you sold is recaptured at up to 25 percent, separately from the capital gains rate. On a rental held fifteen years, recapture can be a six-figure liability by itself. A full exchange defers it too, but any failed or partial exchange exposes it.
- What about the 3.8 percent net investment income tax?
- It applies on top of capital gains for higher-income taxpayers, taking a 20 percent federal rate to 23.8 percent. State tax is additional and can add up to 13.3 percent in California. On a $530,000 gain, the combined federal liability alone can approach $126,000 rather than the $106,000 a 20 percent rate suggests.
- Can I ever access the gain tax free?
- Effectively yes, through a step-up in basis at death. Heirs inherit at fair market value, and the deferred gain across a lifetime of exchanges is wiped out. The strategy is often summarized as swap till you drop, and it is the main reason serious investors chain exchanges rather than ever paying the tax.
- What happens if my identified property falls through?
- You are stuck with what you identified. After day 45 you cannot substitute a new property, which is why experienced exchangers identify three, using the backup slots deliberately. If none closes by day 180, the exchange fails and the full gain becomes taxable in the year of the original sale.
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