This calculator shows how much capital gains tax a 1031 exchange could defer on a US investment property sale. Enter your sale price, adjusted basis, depreciation claimed, and applicable tax rates to see your potential tax liability and what a qualifying exchange would save you.
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How to use this tool
Start with your sale price and adjusted basis. The adjusted basis is your original purchase price, plus any capital improvements you made, minus the total depreciation you have claimed on tax returns. If you are unsure, your tax advisor or cost segregation study will have this figure.
Enter your total depreciation claimed to date. This drives the depreciation recapture calculation, which is taxed at a flat 25% federal rate under Section 1250 of the Internal Revenue Code, regardless of your income level.
Select your federal long-term capital gains rate. This depends on your taxable income: 0% applies to lower income brackets, 15% is the most common rate, and 20% applies to the highest earners. Add your state capital gains rate if your state taxes capital gains. States like California tax capital gains as ordinary income; Florida and Texas have no state income tax.
nnnnUnderstanding your results
Capital gain is the difference between your sale price and adjusted basis. This is the total gain on paper before any tax rules are applied.
Depreciation recapture tax is owed at 25% on depreciation you have already taken as a deduction. This portion cannot be deferred through a 1031 exchange under current IRS rules.
Capital gains tax is applied to your gain after subtracting depreciation claimed, at your combined federal and state rates.
Total tax without 1031 is the sum of depreciation recapture tax and capital gains tax if you sell outright. Tax deferred via 1031 reflects the same amount, since a qualifying 1031 exchange defers all of this tax into your replacement property.nnnn
Legal context
Section 1031 of the Internal Revenue Code allows an investor to defer capital gains tax when selling an investment property, provided the proceeds are reinvested in a like-kind replacement property. The rules require a qualified intermediary to hold the sale proceeds, a 45-day identification period to name replacement properties, and a 180-day closing deadline from the original sale date.
A 1031 exchange cannot be used for primary residences or properties held primarily for sale. It applies only to investment or business-use real estate. Depreciation recapture under Section 1250 is taxed at up to 25% and is not eliminated by a 1031 exchange, only deferred into the replacement property’s basis. When you eventually sell without exchanging, all deferred depreciation and gain becomes taxable.
This tool does not constitute tax advice. The interaction between federal and state tax rules on 1031 exchanges is complex, particularly in states with conformity questions or separate recapture rules. Consult a qualified tax professional before proceeding.
nnnFrequently asked questions
What is a 1031 exchange?
A 1031 exchange is a tax-deferral strategy under Section 1031 of the Internal Revenue Code. When you sell an investment property and reinvest the proceeds into a like-kind property through a qualified intermediary, you defer paying capital gains tax on the sale. The deferred tax carries forward into the new property’s basis rather than being eliminated.
Can I do a 1031 exchange on a rental property in California?
Yes. California conforms to federal 1031 exchange rules, so the exchange itself is valid. However, California requires property owners who exchange out of a California property into an out-of-state property to file a notice and may require an installment agreement if the replacement property is later sold in another state. California taxes the deferred gain when it becomes taxable, even if you live in another state at that time.
Can I do a 1031 exchange on a rental property in Texas?
Yes. Texas has no state income tax, so there is no state capital gains tax to defer or pay. A 1031 exchange in Texas primarily defers federal capital gains tax. The exchange follows the same federal rules: qualified intermediary, 45-day identification, and 180-day close.
Can I do a 1031 exchange on a rental property in New York?
Yes. New York conforms to federal 1031 rules for like-kind exchanges. New York state taxes capital gains as ordinary income, so the state tax deferral can be significant given New York’s top marginal income tax rate. If you exchange a New York property for one in another state, you may owe New York tax when the replacement property is sold, depending on your residency status at that time.
Can I do a 1031 exchange on a rental property in Florida?
Yes. Florida has no state income tax, so a 1031 exchange in Florida defers only federal capital gains tax. The exchange follows standard federal rules and there are no additional Florida-specific requirements.
What is the 45-day rule in a 1031 exchange?
The 45-day identification rule requires you to formally identify potential replacement properties in writing within 45 calendar days of closing your original sale. You can identify up to three properties of any value, or more properties under specific IRS rules. Missing this deadline disqualifies the exchange and makes the full gain taxable immediately.
Does a 1031 exchange eliminate capital gains tax forever?
No. A 1031 exchange defers the tax, it does not eliminate it. The deferred gain and depreciation carry forward into the replacement property’s adjusted basis. If you sell the replacement property without exchanging again, the accumulated deferred gain becomes taxable. One exception: if you hold the replacement property until death, your heirs may receive a stepped-up basis that effectively eliminates the deferred gain under current estate tax rules.
What is depreciation recapture in a 1031 exchange?
Depreciation recapture is the IRS mechanism for taxing the depreciation deductions you have taken over your ownership period. Under Section 1250, unrecaptured depreciation on real property is taxed at up to 25% when you sell. In a 1031 exchange, this tax is deferred rather than eliminated. The depreciation carries forward into the replacement property and reduces its adjusted basis, meaning the recapture tax becomes due when that property is eventually sold without an exchange.
Can I use a 1031 exchange to buy multiple properties?
Yes. Under the Three-Property Rule, you can identify up to three replacement properties regardless of their total value. Under the 200% Rule, you can identify more than three properties provided their combined fair market value does not exceed 200% of the relinquished property’s sale price. You do not have to purchase all identified properties, but you must close on at least one within the 180-day window.
How much does a 1031 exchange cost?
Qualified intermediary fees typically range from $750 to $2,000 for a straightforward exchange. Complex or multi-property exchanges cost more. These fees are a small fraction of the tax deferral benefit, which is why 1031 exchanges are widely used by investment property owners. Attorney, CPA, and title fees are separate and vary by transaction.