1031 Exchange Calculator

A 1031 exchange (named after Section 1031 of the U.S. Internal Revenue Code) lets real estate investors defer capital gains tax when selling an investment property, provided they reinvest the proceeds into a “like-kind” replacement property within strict time limits.

Core formulas: Boot Received = Sale Price − Selling Costs − Replacement Property Price Taxable Gain = the LESSER of Boot Received and Total Realized Gain Deferred Gain = Total Realized Gain − Taxable Gain

That second line is the one that trips people up, and it is worth stating plainly: boot is taxable only up to the amount of gain you actually realised. If you sell for $600,000 a property you bought for $590,000, your gain is $10,000, and pulling $100,000 of cash out does not create $100,000 of taxable income. You are taxed on the $10,000 and no more. The reverse also holds: boot smaller than the gain is fully taxable, not a proportional slice of it.

What each variable means:

• Boot: any cash or non-like-kind property you walk away with. Boot is taxable even inside a 1031 exchange, which is the whole reason people aim to reinvest every dollar.
• Realized Gain: Sale Price minus Selling Costs minus your Adjusted Basis.
• Adjusted Basis: what the IRS considers you paid, after adding capital improvements and subtracting all the depreciation you claimed.
• Like-Kind Property: virtually any US investment real estate qualifies. Residential rentals, commercial buildings, raw land and warehouses are all like-kind to each other.

Depreciation recapture goes first. When there is boot, it is taxed as unrecaptured Section 1250 gain at up to 25% before any of it is treated as long-term capital gain at your lower rate. So the first slice of boot is the expensive slice. Someone who took $80,000 of depreciation over the years and then pulls $30,000 of cash out of the exchange pays 25% on all of it, not 15%.

Critical deadlines:

• 45-Day Identification Rule: identify your replacement properties within 45 days of closing the sale. Calendar days, weekends and holidays included, and there are no extensions.
• 180-Day Exchange Rule: close on the replacement within 180 days of the sale, or by your tax return due date if that comes first.

Worked example: You sell a rental for $600,000 with $10,000 of selling and exchange costs. Your adjusted basis is $250,000, so your realized gain is $600,000 − $10,000 − $250,000 = $340,000. You reinvest into a $575,000 replacement property.

Your boot is $600,000 − $10,000 − $575,000 = $15,000, which is less than the $340,000 gain, so the whole $15,000 is taxable. The remaining $325,000 of gain is deferred into the new property’s basis.

Reference tax rates:

• Long-term capital gains: 0%, 15% or 20%, depending on income.
• Unrecaptured Section 1250 depreciation recapture: up to 25%.
• Net Investment Income Tax (NIIT): an additional 3.8% may apply on top for higher earners. It is not included in the figures below, so add it yourself if your modified adjusted gross income clears $200,000 single or $250,000 married filing jointly.

Deferred, not forgiven. The tax does not go away, it moves. Your replacement property inherits a reduced basis, so the deferred gain resurfaces whenever you eventually sell without exchanging again. Investors who keep rolling until death hand their heirs a stepped-up basis and the gain disappears entirely, which is why 1031 exchanges and estate planning tend to arrive in the same conversation.

A qualified intermediary must hold the funds between the two closings. Touch the money yourself, even briefly, and the exchange is disqualified.