What Is a 1031 Exchange?

Section 1031 of the U.S. tax code allows real estate investors to defer paying capital gains tax when they sell one property and reinvest the proceeds into another similar property within specific time limits. By deferring the tax, investors can leverage the full sale proceeds to purchase a more valuable asset, effectively compounding growth that would otherwise be reduced by taxes.

How the Deferral Works

The capital gain from a sale equals the selling price minus your adjusted basis and closing costs. Without a 1031 exchange, this gain would be subject to federal—and sometimes state—capital gains tax. By completing a like-kind exchange, you postpone that tax until you eventually sell the replacement property without further exchange. This calculator estimates the amount of tax deferred based on your gain and tax rate.

Example Calculation

Imagine you purchased an investment property for $200,000 and made $20,000 in improvements over the years, giving you an adjusted basis of $220,000. You sell it for $350,000 and pay $10,000 in closing costs. Your capital gain is therefore $350,000 minus $220,000 minus $10,000, or $120,000. If your combined capital gains tax rate is 20%, a traditional sale would incur a $24,000 tax bill. By rolling the proceeds into another property via a 1031 exchange, you defer that tax, freeing more cash for your next investment.

Benefits and Considerations

Deferring taxes can accelerate portfolio growth, but 1031 exchanges come with strict rules. You must identify replacement properties within 45 days of selling your original property and close on one or more of them within 180 days. The new property must be of equal or greater value, and all cash proceeds must go through a qualified intermediary, not directly to you. Failure to follow these rules can result in the transaction being disqualified, triggering immediate taxes.

Planning for the Future

Many investors perform multiple exchanges over their lifetime, continually deferring taxes. If you eventually sell without another exchange, the accumulated gains become taxable. However, if the property passes to your heirs, the basis typically resets to market value, potentially eliminating the deferred tax—a strategy sometimes called “swap till you drop.” Consult tax professionals to tailor this strategy to your circumstances.

Using This Calculator

Enter your expected sale price, your current adjusted basis (original purchase price plus improvements minus depreciation), and any closing costs. Provide your anticipated capital gains tax rate, which may include state taxes. The calculator computes the gain and multiplies by the tax rate to show how much tax you defer by completing a successful exchange. Keep in mind this is a simplified estimate and does not account for depreciation recapture or other factors.