1031 Exchange Calculator

A Section 1031 like-kind exchange lets you sell one investment property and buy another without paying the tax on your gain right now. The critical word is defer, not forgive. Nothing is written off. The gain is parked, and it follows you into the next property. What you get is the use of the tax money — the full proceeds keep working in real estate instead of a chunk leaving for the IRS at every trade. Over a career of moving up from a duplex to a fourplex to a small apartment building, that compounding is the entire point.

The clock is the part people get wrong. From the day the property you're selling closes, you have 45 days to identify your replacement property in writing and 180 days to close on it. Both deadlines are measured from that same closing date and they run concurrently — the 180 days is the total period, not 45 days plus another 180. Burn all 45 days deciding and you have 135 left to actually close. There is no extension for a slow lender, a failed inspection, or a seller who backs out. This is why serious exchangers line up candidate properties before they list.

You cannot touch the money. The proceeds must go to a Qualified Intermediary, hired before the sale closes, who holds the funds and buys the replacement property on your behalf. Taking constructive receipt — having the check routed to you or your own account, even for a day, even untouched — disqualifies the exchange. It is the most common way an otherwise clean deal falls apart, and it's entirely preventable with a phone call made a week earlier.

Boot is what trading down costs you. To defer the whole gain, you generally need to buy at or above your net sale price and replace at least as much debt as you paid off. Fall short and the shortfall is boot, which is taxable. Cash boot is proceeds you don't reinvest; mortgage boot is debt relief when the new loan is smaller than the old one. A partial exchange still works — you recognize gain only up to the boot and defer the rest — but people are routinely surprised that paying down debt on the new property generated a tax bill.

Depreciation rides along. The depreciation you claimed lowered your basis every year, which is why long-held rentals have far larger gains than owners expect. That slice is taxed as unrecaptured Section 1250 gain at up to 25% on a sale — and a 1031 defers it too, rather than erasing it. Your basis in the new property is its price minus the deferred gain, so the untaxed gain is baked in from day one, along with smaller future depreciation deductions.

A 1031 is not the route for a home you have lived in. Like-kind exchange treatment is for investment or business property; a principal residence is handled under Section 121 instead, which excludes up to $250,000 of gain — $500,000 on a joint return — rather than deferring it. If the property you are selling was your home for part of the time you owned it, work the residence side out on the home sale capital gains tax calculator first: the ownership and use tests, the reduced exclusion when a move was forced, and the same Section 1250 recapture all behave differently there, and the answer decides whether an exchange is even the cheaper path.

"Swap till you drop." As a general principle, exchanges can be chained indefinitely, and under current law heirs receive a stepped-up basis at death — which is why some investors never sell outright at all. That's a long-horizon estate strategy that turns on rules which can change, so treat it as context rather than a plan, and build it with an estate attorney. In the meantime, judge the replacement property on its own merits: run its cap rate and its full ROI before the tax tail wags the investment dog. A deferred tax bill is a poor reason to overpay for a worse building.