A 1031 Exchange Defers $35,000 in Tax — Worth $33,850 More After 10 Years Invested
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A like-kind exchange doesn't eliminate capital gains and depreciation recapture tax — it defers it. Keeping that money invested instead of paying the IRS now is where the real value compounds.
Deferred tax is still working capital
We ran a $500,000 sale against a $300,000 adjusted basis, with $50,000 of accumulated depreciation, through the calculator. The total gain is $200,000 — $50,000 taxed as depreciation recapture at 25% ($12,500) and $150,000 taxed at a 15% capital gains rate ($22,500), for $35,000 in total tax. Without an exchange, that $35,000 goes to the IRS. With one, it stays invested — and at a 7% return over 10 years, that deferred $35,000 grows to be worth an extra $33,850 compared to having paid it out today. The exchange doesn’t make the tax bill disappear; it makes the money work in the meantime.
How the math works
totalGain = saleProceeds − adjustedBasis. The portion of that gain attributable to depreciation claimed over the holding period is unrecaptured §1250 gain, taxed at up to 25%; the rest is taxed at ordinary long-term capital gains rates (0%, 15%, or 20% depending on income). The exchange defers both. valueOfDeferral = deferredTax × (1+return)^years − deferredTax — the pure compounding benefit of having that capital available to invest instead of paid out.
What this tool doesn’t model: the qualified intermediary fee (typically $600-$1,200, a real but small cost relative to the tax deferred), the requirement that the replacement property be equal or greater in value with all proceeds reinvested to fully defer the recapture, or what happens if the deferral chain ends at death — heirs receive a stepped-up basis, which can eliminate the deferred tax entirely rather than just delaying it.
Math runs locally. Inputs never leave your browser. Source on github.
Where this doesn’t apply
- The property is your personal residence. 1031 exchanges only apply to investment or business-use real property, not a primary home — a different set of rules (Section 121’s home-sale exclusion) applies there.
- You can’t meet the 45-day / 180-day deadlines. These are strict and essentially unforgiving — missing either deadline disqualifies the entire exchange, converting it into a fully taxable sale.
- You plan to eventually cash out and spend the proceeds, not pass them to heirs. The deferral eventually ends in a taxable event unless the chain continues until death — plan for that eventual tax bill, don’t assume the deferral is permanent.
- The replacement property is worth less than the relinquished one. Any difference in value (“boot”) is immediately taxable, partially defeating the purpose of the exchange.
What to actually do
- Engage a qualified intermediary BEFORE closing the sale — the exchange must be structured in advance, not added afterward.
- Start identifying replacement properties immediately; the 45-day clock starts at closing and doesn’t pause for anything.
- Confirm the replacement property’s value and financing will meet or exceed the relinquished property’s, to avoid any taxable “boot.”
- Talk to a tax professional about your specific depreciation schedule and adjusted basis before finalizing the numbers.
- Think through your eventual exit strategy — another exchange, a taxable sale, or holding until death for a stepped-up basis — since each has very different long-term tax consequences.