A Section 1031 exchange lets you sell an investment property and roll the proceeds into a like-kind replacement, deferring the capital-gains tax and depreciation recapture that would otherwise come due. The gain is not erased — it is carried into the replacement property’s lower basis — but the tax is postponed.
A common misconception is that any 1031 exchange is completely tax-free. It is only fully deferred if you reinvest all of your net proceeds and replace the debt you paid off. Cash you keep, or debt you do not replace, is “boot” and is taxable up to the amount of your realized gain.
Formula
Recognized (taxable) gain = lesser of realized gain or boot received
Realized gain is the amount realized (sale price minus selling costs) minus your adjusted basis. Adjusted basis is what you paid plus capital improvements minus depreciation claimed. Boot is any cash you keep plus net debt relief (the old loan you paid off minus the new loan you took on). The IRS taxes the smaller of the realized gain or the boot; the rest is deferred into the replacement property.
How to calculate it
- Compute your adjusted basis: original price + capital improvements − depreciation claimed.
- Compute realized gain: sale price − selling costs − adjusted basis.
- Add up boot: cash you keep + (old mortgage paid off − new mortgage on the replacement).
- Recognized (taxable) gain is the lesser of realized gain or boot; the remainder is deferred.
- Multiply the recognized gain by your blended tax rate for an estimated tax on the boot.
Worked example
Assume you bought an investment property for $250,000, added $20,000 of improvements and claimed $60,000 of depreciation (adjusted basis $210,000). You sell for $400,000 with 6% selling costs and pay off a $150,000 loan. You buy a $400,000 replacement and take a $150,000 loan, keeping no cash. Running those numbers through the RentScope 1031 engine gives:
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FAQ
Is a 1031 exchange tax-free?
No — it defers tax, it does not eliminate it. The deferred gain reduces the basis of the replacement property, so the tax is eventually paid when you sell without another exchange (or through depreciation recapture on the replacement).
What counts as boot in a 1031 exchange?
Boot is value you receive that is not like-kind replacement property. The two common forms are cash boot (money you keep from the proceeds) and mortgage boot (debt relief, when you take on less new debt than you paid off). Both are taxable up to your realized gain.
How much tax do I owe on boot?
Only the recognized gain — the lesser of your realized gain or the boot — is taxed. This calculator applies a blended rate you choose. In practice the rate depends on depreciation recapture (currently up to 25%), long-term capital-gains rates and the 3.8% net investment income tax, plus state tax.
What are the 1031 deadlines?
You generally have 45 days from closing to identify replacement property in writing and 180 days to close on it. This calculator does not track deadlines, so confirm them with a qualified intermediary.
Do I need a qualified intermediary?
Yes. To qualify, the proceeds must be held by a qualified intermediary (QI) or escrow — if you take actual or constructive receipt of the cash, the exchange can fail and the gain becomes taxable.
Does this calculator cover state taxes?
No. It gives a federal-style estimate at a blended rate you enter. Some states conform to Section 1031 and some do not, and state rates vary. Verify with a tax professional.
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