Selling an appreciated investment property triggers a tax bill that is almost always larger than owners expect, because it stacks four separate taxes on top of each other. A 1031 exchange lets you roll the entire proceeds into a replacement property and defer that bill. The question is never whether deferral helps, it always does, but exactly how much it helps for your deal. That is what this tool quantifies.
How the comparison works
The calculator models two paths from the same starting point. Scenario A, the taxable sale, assumes you sell, pay every applicable tax, and walk away with the net proceeds. Scenario B, the 1031 exchange, assumes you reinvest the full proceeds into a like-kind replacement property and defer the tax, so your entire equity stays working.
The gap between the two net figures is the capital you keep invested by exchanging instead of selling. On a typical .5M sale with 00,000 of gain and accumulated depreciation, that difference frequently lands in the low-to-mid six figures, money that would otherwise leave your portfolio permanently on the day of sale.
What's in the tax calculation
Scenario A is the sum of four taxes. Each is calculated independently, which is why the combined rate is so much higher than the headline "15 percent capital gains" figure most owners have in mind.
| Tax | Rate | Applies to |
|---|---|---|
| Federal capital gains | 0%, 15%, or 20% | Your appreciation above original cost, by income bracket |
| Depreciation recapture (unrecaptured §1250 gain) | Up to 25% | The depreciation you deducted over your hold period |
| Net Investment Income Tax (NIIT) | 3.8% | Gains for taxpayers above the income thresholds |
| State income tax | 0% to 13.3% | Varies by state; 0% in TX/FL, highest in CA |
The recapture line is the one that surprises people most. Depreciation recapture is calculated on the depreciation you claimed, not on your profit. You can sell a property for roughly what you paid and still owe a meaningful recapture bill, because the IRS is reclaiming the tax benefit of deductions you took in prior years. A 1031 exchange defers recapture along with everything else.
The power of deferral over time
The immediate tax saving is only half the story. The deferred tax is capital that stays invested and compounds. Projecting both paths forward at a reasonable return over a long hold, the reinvested tax dollars can add hundreds of thousands of dollars to your terminal position, purely because they were never handed to the IRS at the point of sale.
When a 1031 exchange isn't worth it
For balance, deferral is not always the right call. The exchange makes little sense if any of the following are true:
- The gain is small. Under roughly 0,000 of gain, the QI fee and transaction friction can outweigh the deferral benefit.
- You genuinely want to exit real estate. If you are cashing out and not reinvesting, there is nothing to defer into.
- You have offsetting losses. Capital losses elsewhere may already shelter the gain.
- Your state and bracket put you near 0% capital gains. Low-income years can make a straight sale nearly tax-free.
In every other scenario, the math favors the exchange, and usually by a wide margin. For a detailed, scenario-specific number, the 1031 exchange calculator runs the full computation against your actual deal, and the cost breakdown guide shows exactly what the exchange itself costs.
Frequently asked questions
Do I pay tax on depreciation even if I sold at a loss?
Often yes. Depreciation recapture is calculated on the depreciation you claimed over the years, not on your profit. Even a sale near your purchase price can trigger a recapture bill of up to 25% on the depreciation taken.
Does a 1031 exchange eliminate the tax or just defer it?
It defers the tax. You carry the deferred gain into the replacement property's basis. If you keep exchanging and hold until death, your heirs may receive a stepped-up basis that can eliminate the deferred gain, but during your lifetime the tax is postponed, not erased.
What is the Net Investment Income Tax and does it apply to me?
The NIIT is an additional 3.8% tax on net investment income, including real estate gains, for taxpayers above set income thresholds. A 1031 exchange defers the gain, which also defers the NIIT on that gain.
Can I do a partial 1031 exchange and pay tax on only part of the gain?
Yes. If you take some cash out or buy down in value, the portion you do not reinvest is taxable boot, and the rest stays deferred. A partial exchange falls between the two columns the calculator shows.
What happens to the deferred tax when I die?
Under current law, inherited property generally receives a step-up in basis to fair market value at death, which can wipe out the deferred capital gain for your heirs. This is why many investors exchange repeatedly and never sell outright.
This tool and article are for informational and planning purposes only and do not constitute legal, investment, or tax advice. Tax rates and rules are complex and change over time. Always consult a qualified attorney, investment advisor, and/or accountant before acting.
