1031 Exchange Calculator
Work out the tax deferred by a 1031 exchange, the boot that stays taxable when you trade down, and the minimum reinvestment needed for full deferral.
How to use this calculator
- 1Enter the sale price, selling costs, adjusted basis and mortgage repaid on the property you are selling.
- 2Enter the replacement property price and the new mortgage you will take.
- 3Check the deferral table: to defer everything you must meet all three tests — price, equity reinvested, and debt replaced.
- 4If boot appears, either buy at a higher price, borrow more, or bring extra cash to closing to eliminate it.
How the calculation works
Realised gain = net sale price − adjusted basis. Boot = cash not reinvested + (debt relieved − debt replaced − cash added). Recognised gain = min(boot, realised gain)- boot
- Anything received that is not like-kind property — cash kept, or debt relief not replaced
- recognised gain
- The part taxed now. Boot is taxable, but never more than the total gain
- deferred gain
- The rest, which reduces the replacement property's basis and is taxed on a future sale
The practical rule for full deferral is to trade up in both price and debt, and move all the equity across. Buying cheaper, borrowing less, or keeping any cash creates boot.
Mortgage boot can be offset by bringing additional cash to the closing, which is why debt relief alone does not automatically create a tax bill.
Deferral is not forgiveness. The deferred gain lowers the basis of the replacement property, so it resurfaces on a later sale — unless the property is held until death, when heirs generally receive a stepped-up basis.
Worked example
A clean full-deferral exchange
- 1.Net sale price is $846,000 and the basis is $350,000, so the realised gain is $496,000.
- 2.Equity released is $846,000 − $300,000 = $546,000, and the replacement is bought for $900,000 with a $300,000 mortgage — so $600,000 of cash is required and all the equity goes across.
- 3.Price is at least the net sale price and debt is fully replaced, so no boot arises.
- 4.The whole $496,000 gain is deferred, including $120,000 of depreciation that would otherwise be recaptured at 25%.
Result: Full deferral — no tax now
Trading down creates boot
- 1.The same $496,000 gain arises, and equity of $546,000 is released.
- 2.The replacement costs $700,000 with a $200,000 mortgage, so only $500,000 of cash is needed — leaving $46,000 of cash boot.
- 3.Debt also falls from $300,000 to $200,000, adding $100,000 of mortgage boot.
- 4.That boot is taxable now, and depreciation recapture at 25% is taken out of it first.
Result: Boot taxed now, the remainder still deferred
What a 1031 exchange does
Section 1031 lets an investor sell real property held for business or investment and reinvest the proceeds into other like-kind property without recognising the gain at the time. Tax is not forgiven — it is deferred, by carrying the old property's basis into the new one.
The power is compounding. Capital gains tax plus depreciation recapture can easily take a quarter of the equity out of a sale, and every dollar not paid to the IRS stays invested and continues to earn. An investor who exchanges repeatedly across decades can build a substantially larger portfolio than one who pays tax at each step.
Since the 2017 tax reform, only real property qualifies. Exchanges of equipment, vehicles, artwork and other personal property no longer receive this treatment.
Boot, and the rule that avoids it
Boot is anything received in the exchange that is not like-kind property. It comes in two forms and both are taxable up to the amount of the realised gain.
Cash boot is equity not reinvested — money kept from the sale rather than rolled into the replacement. Mortgage boot is debt relief: if the old property carried a $300,000 mortgage and the new one only $200,000, the $100,000 reduction is treated as value received. Mortgage boot can be offset by bringing additional cash to the closing, but cash boot cannot be offset by taking on more debt.
The practical rule that avoids boot entirely is straightforward: buy replacement property of equal or greater value, replace at least as much debt, and move all of the equity across. Trading down in either price or debt creates boot in proportion to the shortfall.
Deadlines and mechanics that void the exchange
Section 1031 is procedurally strict, and failures are not fixable after the fact.
- 45 days to identify — from the closing of the sale, you have 45 calendar days to formally identify replacement property in writing. There are no extensions for weekends or holidays, and the identification rules limit how many properties can be listed.
- 180 days to close — the replacement purchase must complete within 180 days of the sale, or by your tax return due date including extensions, whichever comes first. The two clocks run concurrently, not consecutively.
- A qualified intermediary must hold the funds — you cannot receive the sale proceeds, even briefly. Constructive receipt of the money disqualifies the whole exchange, which is why a qualified intermediary must be engaged before the sale closes — not after.
- Like-kind is broad for real property — almost any real property held for investment or business qualifies as like-kind to almost any other. Raw land can be exchanged for an apartment building. A personal residence cannot be exchanged at all.
Where the deferred tax eventually goes
The deferred gain reduces the basis of the replacement property, so it resurfaces whenever that property is sold outright. Investors who exchange repeatedly accumulate an increasingly large deferred gain against an increasingly low basis.
The strategy that many investors pursue is to keep exchanging indefinitely and hold until death, at which point heirs generally receive a stepped-up basis equal to the property's fair market value. The deferred gain is then eliminated rather than merely postponed. That outcome depends on estate tax law remaining as it is, which is not guaranteed — but it is the reason 1031 exchanges are so central to long-term real estate strategy.
What this assumes, and where it stops
Assumptions
- Both properties are real property held for investment or business use, and qualify as like-kind.
- The exchange is a deferred exchange using a qualified intermediary, completed within the statutory deadlines.
- Selling costs reduce the amount realised, and boot is calculated after those costs.
- Depreciation recapture is taken out of any recognised gain before the capital gains rate applies.
Limitations
- State tax treatment differs — some states have clawback provisions that tax deferred gain when property leaves the state.
- Partial-year and reverse exchanges, and improvement exchanges, follow different mechanics not modelled here.
- The identification rules limiting how many replacement properties can be named are not enforced by this calculation.
- 1031 exchanges are unforgiving of procedural error. Engage a qualified intermediary and a tax professional before the sale closes.
Common questions
What is boot in a 1031 exchange?
Boot is anything you receive that is not like-kind property, and it is taxable up to the amount of your gain. Cash boot is sale equity you keep rather than reinvest. Mortgage boot is debt relief — if the new mortgage is smaller than the old one, the difference counts as value received. Mortgage boot can be offset by bringing extra cash to closing; cash boot cannot be offset by borrowing more.
How much do I need to reinvest to defer all the tax?
Buy replacement property worth at least the net sale price of what you sold, replace at least as much debt as you paid off, and move all of the equity across. Falling short on any of the three creates boot in proportion to the shortfall. The summary table here shows all three tests against what you actually did, so you can see which one is binding.
What are the 45-day and 180-day rules?
From the day your sale closes you have 45 calendar days to identify replacement property in writing, and 180 days to complete the purchase. The clocks run concurrently, so the 180 days includes the first 45. There are no extensions for weekends or holidays, and missing either deadline disqualifies the exchange entirely — the gain becomes taxable in the year of the sale.
Can I do a 1031 exchange on my home?
No. Section 1031 applies only to property held for productive use in a trade or business or for investment, so a personal residence does not qualify. Homeowners have a different and often better relief — the Section 121 exclusion, which can exempt up to $500,000 of gain outright rather than merely deferring it. A property that was genuinely a rental can qualify, subject to holding-period scrutiny.
Sources
- Like-Kind Exchanges — Real Estate Tax Tips — US Internal Revenue Service
- Form 8824, Like-Kind Exchanges — US Internal Revenue Service
Formula and content last reviewed on .
Results are estimates for information only, not professional advice.
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