Updated June 17, 2026
See exactly what you would defer
Enter sale price, adjusted basis, and mortgage payoff to see deferred gain, any boot, and cash available for the replacement.
A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets you sell investment or business-use real estate and defer federal capital gains tax and depreciation recapture by reinvesting the full sale proceeds into a like-kind replacement property. No tax is owed at the relinquished closing. The gain carries forward into the replacement property's adjusted basis and stays deferred until you eventually sell without doing another exchange.
How the deferral actually works
In a standard sale, the IRS taxes any amount above your adjusted basis. In a 1031 exchange, a qualified intermediary holds the sale proceeds so you never take constructive receipt of the cash. You use those funds to purchase a replacement property within the required deadlines. Because the money passed through a third party rather than your hands, no tax event is recognized in the year of sale.
What qualifies as "like-kind"
For real estate, the IRS interprets "like-kind" broadly. An apartment building can be exchanged for commercial land, a warehouse, a single-family rental, or a strip center. What does not qualify: primary residences, vacation homes used primarily for personal use, fix-and-flip inventory, securities, and personal property (excluded since the Tax Cuts and Jobs Act of 2017). Both the relinquished and the replacement property must be held for investment or productive use in a trade or business.
Why investors use it
The math is simple enough. If you owe $150,000 in capital gains tax on a sale, that is $150,000 less deployed into the replacement property. Keeping it invested changes the return on every deal that follows. Some investors have run chains of exchanges across decades without ever triggering the deferred tax during their lifetime, passing properties to heirs who receive a stepped-up basis that can eliminate the gain entirely. That strategy is commonly called "swap till you drop." The outcome depends heavily on individual circumstances and estate law at time of death, so talk to a CPA before counting on it.
The key numbers
For a fully deferred exchange, the replacement property must be equal to or greater in value than the net sale price, and all proceeds must be reinvested. Trading down in value or keeping any cash creates boot, taxable up to the amount of your gain. The calculator shows how partial reinvestment affects the outcome.
A brief history of the rule
Section 1031 has been in the tax code in some form since 1921, when it allowed only simultaneous property swaps. The 1979 Starker case established that an exchange need not be simultaneous, which created the modern deferred structure: sell, hold the proceeds with a QI, then buy. The Tax Cuts and Jobs Act of 2017 narrowed the provision to real property only, ending exchanges involving equipment, vehicles, and artwork.
This article is for educational purposes only and is not tax or legal advice. 1031 exchanges have strict rules and hard deadlines. Consult a qualified intermediary and a tax professional before structuring any exchange. Figures are current as of the date above and may change.
See exactly what you would defer
Enter sale price, adjusted basis, and mortgage payoff to see deferred gain, any boot, and cash available for the replacement.