Section 1031 Exchange Tax Deferral Calculator
Calculate exactly how much federal capital gains tax, depreciation recapture, and state tax you defer by completing a like-kind exchange under IRC Section 1031. Uses 2026 IRS rates.
What Is a Section 1031 Like-Kind Exchange?
A Section 1031 exchange (named after IRC § 1031) allows real estate investors to defer paying federal capital gains tax and depreciation recapture when they sell investment or business property and reinvest the proceeds into another like-kind property. The deferral can be repeated indefinitely — when the final replacement property is eventually inherited, the heirs receive a stepped-up basis under IRC § 1014, potentially eliminating the deferred tax entirely.
Since the 2017 Tax Cuts and Jobs Act, Section 1031 applies only to real property (real estate) used for investment or business — personal property, equipment, vehicles, and primary residences no longer qualify.
The 4 Strict IRS Deadlines
Per IRS Section 1.1031(k)-1, the exchange must follow these strict rules:
- Day 0: Sale of the relinquished property closes. Proceeds must go to a Qualified Intermediary (QI), not to you directly.
- Day 45 (Identification Period): You must identify up to 3 replacement properties (or more under the 200% rule) in writing to the QI by midnight of day 45.
- Day 180 (Exchange Period): The replacement property purchase must close by day 180 (or the due date of your tax return for the year of sale, whichever is earlier).
- Like-Kind: Replacement must be "like-kind" — any real property in the US (raw land for an apartment building is fine). Replacement property must equal or exceed the value of the relinquished property and equal or exceed the debt.
Boot — The Taxable Portion
If the replacement property costs less than what you sold, or if you receive cash or debt relief in the exchange, the difference is called "boot" and is taxable in the year of sale. Per IRC § 1031(b), boot is taxed at the same rates as if you had not exchanged at all — depreciation recapture first (up to 25%), then LTCG (15% or 20%), plus NIIT and state tax as applicable.
Depreciation Recapture Under Section 1250
When you sell investment real estate that has been depreciated, the IRS recaptures the depreciation as ordinary income up to a 25% maximum rate under IRC § 1250. This recapture portion is one of the biggest tax savings a 1031 exchange defers. On a $90,000 depreciation balance, the recapture tax alone can be $22,500 — completely deferred by a properly-structured exchange.
Qualified Intermediary Costs
A 1031 exchange requires a third-party Qualified Intermediary (QI) to hold the sale proceeds — you cannot touch them directly. QI fees typically range from $750 to $1,500 for a standard delayed exchange and $2,500 to $5,000 for a reverse exchange. These costs are tiny compared to the typical six-figure tax deferral.
When a 1031 Exchange Is NOT Worth It
- Small gain — If your taxable gain is under $50,000, the QI fee and complexity may exceed the savings.
- No suitable replacement property — Forcing yourself into a worse property to meet the 45/180-day deadlines can cost more than the tax savings.
- You need the cash — All proceeds must roll into the replacement; you cannot keep cash without paying tax on it.
- Already living in the property — Section 121 ($250K/$500K primary residence exclusion) is usually better than 1031 for owner-occupied homes.
Sources: IRS Section 1031 (irs.gov), IRC §§ 1031, 1250, 1411, Treasury Reg. §1.1031, Federation of Exchange Accommodators (1031.org). Last updated: May 2026.
Frequently Asked Questions
What property qualifies for a 1031 exchange?
Per IRS Section 1.1031, only real property held for investment or business use qualifies. Personal residences, vacation homes used personally, and (since TCJA 2017) personal property like equipment do not qualify. The replacement must also be real property held for investment — but it can be any type of real estate (raw land for apartment building, single-family for multifamily, etc.).
How long do I have to complete a 1031 exchange?
Two strict IRS deadlines: identify replacement property in writing by Day 45 (calendar days, including weekends and holidays); close on the replacement by Day 180 (or the due date of your tax return for that year, whichever is earlier). Missing either deadline disqualifies the entire exchange — the gain becomes immediately taxable.
Can I touch the sale proceeds during a 1031 exchange?
No — per Treasury Reg. §1.1031(k)-1(g), if you have actual or constructive receipt of any proceeds, the exchange fails. You must use a Qualified Intermediary (QI) who holds the funds in escrow until they are wired to the seller of the replacement property. Always use an established QI — verify their bonding and segregation of accounts.
What is "boot" in a 1031 exchange?
Boot is any non-like-kind property received in the exchange, including cash, debt relief (if replacement debt is less than relinquished debt), or other personal property. Boot is taxable in the year of sale at the same rates as if you had not exchanged — depreciation recapture first, then LTCG, plus NIIT and state tax. The total tax on boot is limited to the recognized gain.
Can a 1031 exchange defer state taxes too?
Most states follow the federal 1031 treatment and defer state tax along with federal. Notable exceptions: California has "clawback" rules — if you exchange CA property for out-of-state property, CA can later collect tax when you sell. Check your state's specific 1031 rules with a CPA before relying on full state deferral.
When does the deferred tax become permanent?
If you hold the final replacement property until death, your heirs receive a stepped-up basis under IRC §1014 — the deferred capital gain and depreciation recapture are wiped out entirely. This is the "swap till you drop" strategy. The Joint Committee on Taxation estimates that $7+ billion of annual tax is permanently avoided through 1031 exchanges followed by death-based step-up.