1031 Exchange Capital Gains Tax Calculator

Three layers of tax on a sale

When you sell appreciated investment property without a 1031 exchange, the IRS collects on three fronts. Most investors are surprised by how large the combined bill can be — and how much of it a well-executed exchange can defer indefinitely.

• Long-term capital gains. Federally taxed at 0%, 15%, or 20% depending on your taxable income. Most investors selling appreciated property fall in the 15% or 20% bracket. State taxes add another layer on top.
• Unrecaptured §1250 depreciation recapture. The depreciation deductions you claimed over the years are "recaptured" at up to 25% — higher than the capital-gains rate — and this is often the biggest surprise at closing.
• 3.8% net investment income tax (NIIT). An additional Medicare surtax applies to net investment income for higher earners (modified AGI above $200,000 single / $250,000 married filing jointly). It applies to the full gain.

How a 1031 defers all three

A fully-qualified 1031 exchange defers every layer listed above — federal capital gains, depreciation recapture, NIIT, and most state tax — as long as you reinvest all your equity into like-kind replacement property and replace at least as much debt as you paid off. The tax isn't forgiven, but it can be deferred indefinitely and potentially eliminated at death via a stepped-up basis for heirs.