1031 Exchange Calculator

Section 1031 of the Internal Revenue Code lets you defer capital gains tax and depreciation recapture when you sell investment or business real estate and reinvest the proceeds in like-kind real property. "Like-kind" is broad for real estate: you can exchange a rental house for an apartment building, land or commercial property, as long as both are held for investment or business use in the U.S.

The sale proceeds must go to a qualified intermediary — if you take possession of the cash, the exchange fails. Two deadlines are strict: you must identify replacement properties within 45 days of the sale and close on them within 180 days.

To defer all the tax, buy replacement property of equal or greater value, reinvest all the net cash proceeds, and replace the debt you paid off (with new debt or additional cash). Anything you receive that is not like-kind property — cash left over, or debt relief not replaced — is "boot" and is taxable up to the amount of your gain.

Deferral is not forgiveness. Your basis carries over to the new property, so the deferred gain is taxed when you eventually sell in a taxable sale — unless you exchange again, or the property passes to heirs with a stepped-up basis.