1031 Exchange Tax-Deferral Calculator

Should you do a 1031 exchange or pay the tax and diversify? This calculator shows the exact tax bill you avoid — broken down by capital gains, depreciation recapture, and NIIT — plus the long-run cost of giving up that capital now.

How the 1031 math works

Step 1: Your realized gain

Realized gain = Sale price − Adjusted basis − Selling costs. Adjusted basis = original cost + capital improvements − accumulated depreciation. Most investors underestimate this because depreciation (even if not taken) reduces basis — you get recaptured on "allowed or allowable" depreciation regardless of whether you claimed it.

Step 2: The tax stack

The gain isn't all taxed at one rate. It's a stack:

1. Depreciation recapture (unrecaptured §1250 gain) — the portion of your gain equal to accumulated depreciation is taxed first, at a maximum 25% rate. This applies to straight-line depreciation on residential/commercial property. Cost segregation accelerations via 5/7-year components are taxed as ordinary income (§1245 recapture) — fully at your marginal rate, not capped at 25%.
2. Remaining capital gain — taxed at 0%, 15%, or 20% depending on your total taxable income. Your other income "fills up" the lower brackets first.
3. NIIT (Net Investment Income Tax) — a 3.8% surtax on net investment income applies if MAGI exceeds $200K (single) or $250K (MFJ). This calculator assumes the full gain is subject to NIIT if you're over threshold — in practice your CPA will calculate this precisely.
4. State capital gains tax — many states tax capital gains as ordinary income. California at 13.3% makes a dramatic difference.

What a 1031 does

A 1031 exchange defers all of these taxes — recapture, capital gains, NIIT — by rolling your equity into a replacement property. The deferred basis carries forward: your replacement property starts with a lower basis, which means higher gains (and larger recapture) when you eventually sell. The game plan is to keep rolling 1031s until death, at which point heirs receive a stepped-up basis that eliminates the deferred gain entirely.

What it doesn't solve

A 1031 only works if you want to stay in real estate. If your goal is diversification — putting rental equity into a balanced portfolio — a 1031 keeps you in RE by definition. Some investors use a Delaware Statutory Trust (DST) as the replacement property: you exchange into a passively managed institutional property, get the 1031 deferral, and stop being an active landlord. Others use Qualified Opportunity Zones for diversification with a partial deferral. These strategies deserve proper advisor modeling.

When NOT to do a 1031

• Your property has large accumulated suspended passive losses that will release on sale — they may wipe out the taxable gain anyway.
• You're in the 0% LTCG bracket (total income under $98,900 MFJ in 2026) — there may be little federal tax to defer.
• The basis step-up at death makes deferral automatic — if heirs will inherit soon, deferring further may be unnecessary complexity.
• You can't identify a good replacement property within 45 days — a bad deal just to complete the exchange is worse than paying the tax.