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1031 exchange calculator: sell, hold, or exchange?
Selling a rental triggers depreciation recapture, capital gains tax, and state tax, but it also releases your suspended passive losses. This 1031 exchange calculator runs the full after-tax waterfall on a sale and compares it to deferring the gain in a 1031 exchange, the same way the Oberlin24 decision engine does.
Educational estimate at high-bracket default rates (recapture 28.8% = 25% + 3.8% NIIT; capital gains 23.8% = 20% + 3.8% NIIT; state 9.3%; suspended losses released at a 45% ordinary rate). Your real rates depend on your bracket and state. Not tax advice, confirm with your CPA.
How the tax on selling a rental is calculated
The rows above follow the same order the IRS does (see IRS Topic No. 409 on capital gains). Take the sale price, subtract selling costs and your adjusted basis (what you paid minus all the depreciation you have claimed), and what is left is the total gain. That gain is then taxed in two separate layers, which is why one flat “capital gains tax” rate never matches the real bill:
- Depreciation recapture on the depreciation you took, unrecaptured Section 1250 gain at up to 25% (28.8% here, with the 3.8% NIIT).
- Capital gains on the remaining appreciation, at the long-term rate plus NIIT (23.8% here), plus any state tax.
Not sure how much depreciation you have claimed? Estimate it with the rental depreciation calculator and enter the total above, it is the single input that moves the recapture line the most.
What a 1031 exchange defers, and the rules
A 1031 exchange rolls your sale proceeds into a like-kind replacement property and defers the whole gain, capital gains and depreciation recapture both, so you owe nothing at the time of sale. Three hard rules govern it: the replacement must be like-kind investment real estate, you identify candidates within 45 days of closing, and you close within 180 days, with a qualified intermediary holding the cash so you never touch it. Miss a deadline and the entire gain becomes taxable that year. The deferral is not forgiveness: the tax follows into the new basis and comes due when you finally sell for cash, though a step-up at death can erase it, one reason depreciation is also what lets many landlords pay little or no tax while they hold. And if a primary residence enters the picture on either end (exchanging a converted former home, or moving into the replacement later), the 1031 primary-residence rules add their own safe-harbor clocks on top of these deadlines. The official form is IRS Form 8824.
Partial exchanges and boot
You do not have to reinvest every dollar. Any cash you keep, or any drop in the mortgage you replace, is boot and is taxed in the year of sale, recapture first. A partial exchange defers most of the tax while letting you take some money off the table, run the sale both ways above to see what the boot would cost.
Why selling sometimes beats a 1031
The reflex is to 1031 everything to defer tax. But a 1031 also means your suspended passive losses stay suspended, you don’t get to use them. An outright sale is a fully taxable disposition, which releases those losses as an ordinary deduction.
When the suspended-loss balance is large, that release can outweigh the tax you’d defer. We’ve run a real two-property portfolio where roughly $206,000 of suspended losses made selling the better move, the spreadsheet disagreed with the instinct. This tool surfaces exactly that crossover: compare the tax you’d defer against the loss release you’d trigger. If you are still holding, the other ways to reduce capital gains tax on a rental and the return on the equity you would free up both feed the decision.
Frequently asked questions
How do I calculate capital gains tax when I sell a rental property?
Start from the sale price, subtract selling costs and your adjusted basis (what you paid minus all the depreciation you have claimed), and what is left is the total gain. That gain is taxed in two separate layers: the depreciation you took comes back as unrecaptured Section 1250 gain at up to 25%, and the remaining appreciation is taxed at the long-term capital-gains rate (0, 15, or 20%) plus the 3.8% net investment income tax and any state tax. The calculator above breaks out each layer, so you see the real number instead of a single headline rate.
How much tax does a 1031 exchange defer?
All of it, for now. A 1031 exchange rolls the entire gain, both the capital-gains portion and the depreciation recapture, into a like-kind replacement property, so you owe nothing at the time of sale. The deferred tax rides along in the new property's basis and comes due only when you eventually sell without exchanging again. Keep exchanging until death and the step-up in basis can erase it entirely.
What are the 1031 exchange rules and deadlines?
Three hard rules. The replacement must be like-kind investment real estate, you must identify candidates within 45 days of closing your sale, and you must close on the replacement within 180 days. A qualified intermediary has to hold the proceeds in between, you can never touch the cash, or the exchange fails. Miss any deadline and the whole gain becomes taxable that year.
Can I do a partial 1031 exchange?
Yes, but the part you keep is taxable. Any cash you pull out, or any drop in the mortgage you replace, is called boot and is taxed in the year of sale, usually as depreciation recapture first. So a partial exchange defers most of the tax while letting you take some money off the table. Run both the full-sale and the exchange numbers above to see what the boot would cost.
How is depreciation recapture calculated when I sell?
Every dollar of depreciation you claimed lowered your basis, so it raises your taxable gain by the same amount at sale. That slice is unrecaptured Section 1250 gain, taxed at up to 25%, separate from the capital-gains rate on the appreciation. Estimate the total you have claimed with the rental depreciation calculator, then enter it above as depreciation taken to date, that is the number that comes back at sale.
When does selling outright beat a 1031 exchange?
When your suspended passive losses are large. A sale is a fully taxable disposition, which releases those suspended losses as a deduction, while a 1031 keeps them suspended. If the loss release outweighs the tax you would defer, paying the tax and selling wins, the case most people miss. The calculator flags that crossover: we have seen roughly $206,000 of suspended losses tip a real two-property portfolio toward selling.