# 1031 Tax Deferral Calculator: What Taxes Can an Exchange Defer?

> Estimate the federal and state tax a 1031 exchange could defer on investment property: depreciation recapture, capital gains, the 3.8% NIIT, and state tax.

Source: https://baker1031.com/tools/1031-tax-deferral-calculator


By Jerry Baker, Founder, Baker 1031 Investments. Published October 24, 2026; updated October 24, 2026. Interactive calculator: https://baker1031.com/tools/1031-tax-deferral-calculator

A 1031 exchange lets you sell investment real estate and buy like-kind real estate without paying tax on the gain right away. On a hypothetical $640,000 gain, the federal and state tax a full exchange could defer adds up to about $217,000 in the example below. That is money that can stay invested.

## How the calculator works

1. Adjusted basis = original purchase price + capital improvements − depreciation taken.
2. Gain = (sale price − selling costs) − adjusted basis (never below zero).
3. Unrecaptured Section 1250 gain = the smaller of depreciation taken and the gain, taxed at up to 25%.
4. The rest of the gain is taxed at your federal long-term capital gains rate (0%, 15%, or 20%).
5. Net investment income tax = 3.8% of the gain, if it applies to you.
6. State tax = your state rate × the gain (a flat estimate; some states tax gains differently).
7. Estimated tax deferred = the sum of those lines: roughly what a full 1031 exchange could defer, not eliminate.

Results are estimates for education, not tax or legal advice.

## Key takeaways

- A 1031 exchange defers tax. It does not erase it. The gain you don't pay tax on now is carried into your replacement property.
- Your taxable gain is your net sale price minus your **adjusted basis**. Adjusted basis is what you paid, plus improvements, minus the depreciation you've taken.
- Up to four layers of tax can apply when you sell: depreciation recapture (taxed at up to 25%), federal capital gains tax (0%, 15%, or 20%), the 3.8% net investment income tax, and state income tax.
- Depreciation is the layer many owners forget. It lowers your taxes each year you own the property, but it raises your taxable gain when you sell.
- Deferred tax money can keep working for you. Over 10 years, that difference can grow into a large number, though nothing about future returns is guaranteed.
- The calculator above gives you an estimate only. Your CPA confirms the real numbers for your situation.

## What taxes does a 1031 exchange defer?

When you sell an investment property for more than your adjusted basis, you have a gain. The IRS and your state want a share of that gain. A 1031 exchange lets you push that tax bill into the future, as long as you follow the rules.

The rule comes from Section 1031 of the Internal Revenue Code. The law says, in part: "No gain or loss shall be recognized on the exchange of real property held for productive use" in a business or for investment, "if such real property is exchanged solely for real property of like kind." You can read the full text of [26 U.S.C. §1031 at Cornell's Legal Information Institute](https://www.law.cornell.edu/uscode/text/26/1031).

So which taxes are we talking about? For most individual investors, there are four.

1. **Depreciation recapture.** This is tax on the part of your gain that came from depreciation deductions you took over the years. For real estate, the IRS calls this "unrecaptured section 1250 gain."
2. **Federal long-term capital gains tax.** This is the tax on the rest of your gain, if you held the property more than a year. The rates are 0%, 15%, or 20%.
3. **The net investment income tax (NIIT).** This is an extra 3.8% federal tax for people with higher incomes.
4. **State income tax.** Most states tax capital gains. Some, like California, tax them the same as wages.

A full 1031 exchange can defer all four. A partial exchange defers only part. I'll explain the difference later.

Let me walk through each piece in plain English. Then I'll show you exactly how the calculator adds them up.

## What is the difference between realized gain and recognized gain?

These two terms sound alike. They mean very different things.

**Realized gain** is the profit you actually made on the sale. It's the economic gain. If you sold for $1,140,000 after costs and your adjusted basis was $500,000, you realized a $640,000 gain. That's true whether you do an exchange or not.

**Recognized gain** is the part of your realized gain that you must report and pay tax on this year. In a normal sale, all of your realized gain is recognized. In a full 1031 exchange, none of it is. In a partial exchange, some of it is.

The IRS instructions for Form 8824, the form you use to report a like-kind exchange, describe how this works. They say "gain is recognized to the extent of the other property and money received." In other words, if you take cash out or receive something that isn't like-kind real estate, that part gets taxed. The instructions also say "Form 8824 figures the amount of gain deferred as a result of a like-kind exchange." You can read the [IRS Instructions for Form 8824](https://www.irs.gov/instructions/i8824) for the full details.

Here is a simple way to think about it:

- **Realized gain** = what you made.
- **Recognized gain** = what you're taxed on now.
- **Deferred gain** = realized gain minus recognized gain.

The goal of a full 1031 exchange is to make the recognized gain zero. Then the whole realized gain is deferred.

## What is adjusted basis, and how do you figure it?

Your **basis** is your starting point for measuring gain. For a property you bought, it usually begins with what you paid. Then it changes over time. The changed number is your **adjusted basis**.

IRS Publication 544, which covers sales of assets, explains the two main changes. It says "Increases to basis include costs of any improvements having a useful life of more than 1 year." It also says "Decreases to basis include depreciation and casualty losses." You can find this in [IRS Publication 544, Sales and Other Dispositions of Assets](https://www.irs.gov/publications/p544).

So the basic formula is:

**Adjusted basis = purchase price + capital improvements − depreciation**

Let's define each part.

### Purchase price

This is what you paid for the property. Certain buying costs, like some closing costs, may be added to it. Your CPA will know which ones count.

### Capital improvements

A **capital improvement** is work that adds value, extends the life of the property, or adapts it to a new use. A new roof, a new HVAC system, or an added unit are common examples. Routine repairs, like fixing a leaky faucet, usually don't count. They are expenses you deduct in the year you pay them.

### Depreciation

**Depreciation** is a yearly tax deduction for the wear and tear on a building. You can't depreciate land. Each year you own a rental, you can usually deduct part of the building's cost. That lowers your taxable rental income.

Here's the catch. Every dollar of depreciation you deduct also lowers your basis by a dollar. A lower basis means a bigger gain when you sell. That's why owners who have held a property a long time often have a much larger gain than they expect.

### A quick example of adjusted basis

Say you bought a small apartment building for $600,000. Over the years, you spent $50,000 on a new roof and new windows. You also took $150,000 of depreciation deductions.

- Purchase price: $600,000
- Plus improvements: + $50,000
- Minus depreciation: − $150,000
- **Adjusted basis: $500,000**

Notice that your adjusted basis is lower than what you paid, even though you put more money into the building. Depreciation did that.

## How do you calculate the gain on an investment property sale?

Once you know your adjusted basis, figuring the gain is simple.

Publication 544 says "You figure the gain by subtracting your adjusted basis from your amount realized." Your **amount realized** is, in general, the sale price minus your selling costs. Selling costs include things like broker commissions, title fees, and transfer taxes.

**Gain = (sale price − selling costs) − adjusted basis**

Continuing our example, say you sell the building for $1,200,000. Your selling costs are $60,000.

- Sale price: $1,200,000
- Minus selling costs: − $60,000
- Amount realized: $1,140,000
- Minus adjusted basis: − $500,000
- **Gain: $640,000**

Two quick notes. First, if your adjusted basis is higher than your amount realized, you have a loss, not a gain. The calculator shows zero tax in that case. Second, paying off your mortgage at closing does not reduce your gain. The loan payoff comes out of your proceeds, but the gain is figured the same way. Publication 544 also notes that "The amount you realize also includes any of your liabilities that were assumed by the buyer." Debt can get tricky, so ask your CPA how your loan affects your numbers.

## What is depreciation recapture on real estate?

Depreciation recapture is the IRS taking back some of the tax benefit you got from depreciation. When you sell, the part of your gain that came from depreciation gets taxed at its own rate.

For buildings, this is usually called **unrecaptured section 1250 gain**. The name is clunky. The idea is simple. It's the part of your gain equal to the depreciation you took, up to the total gain.

IRS Tax Topic 409 says: "The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate." You can read [IRS Topic No. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409) for more.

The legal definition lives in [26 U.S.C. §1(h) at Cornell](https://www.law.cornell.edu/uscode/text/26/1). It's long and technical. In plain English, it's the long-term gain that would be treated as ordinary income if all of your depreciation were recaptured.

There's one more wrinkle. Section 1250 itself can treat some "additional depreciation" as ordinary income. The statute defines additional depreciation as depreciation beyond "the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method." That's from [26 U.S.C. §1250 at Cornell](https://www.law.cornell.edu/uscode/text/26/1250). If you used a faster depreciation method, or did a cost segregation study that split out parts of the building, some of your gain may be taxed differently. The calculator doesn't model that. Ask your CPA if it applies to you.

In our example, you took $150,000 of depreciation. Your gain was $640,000. So $150,000 of the gain is unrecaptured section 1250 gain. At the 25% maximum rate, that's up to $37,500 of tax.

Why does this matter so much? Because depreciation recapture is taxed at a higher rate than most capital gains. And you can't avoid it just by holding longer. The only ways to deal with it are to pay it, defer it, or (in some cases) have it go away at death, which I'll explain below.

## What are the federal long-term capital gains tax rates?

After you set aside the depreciation part, the rest of your gain is usually a long-term capital gain. That's true if you held the property more than one year.

The federal rates for long-term capital gains are 0%, 15%, and 20%. Which rate you pay depends on your taxable income and filing status.

IRS Topic 409 lists the thresholds for 2025. It says the 0% rate applies if your taxable income is less than or equal to "$96,700 for married filing jointly and qualifying surviving spouse." The 15% rate applies up to "$600,050 for married filing jointly and qualifying surviving spouse." Above that, the 20% rate applies. For single filers, the 15% bracket runs up to "$533,400." These numbers change each year, so check the current page.

Here's the thing many sellers miss. A big sale can push your income for that year into a higher bracket all by itself. Someone who normally pays 15% may find that a large chunk of their gain is taxed at 20% in the year they sell.

The calculator lets you pick one rate for simplicity. In real life, part of your gain might fall in one bracket and part in another. Your CPA can run the exact numbers.

## What is the 3.8% net investment income tax?

The **net investment income tax**, or NIIT, is an extra federal tax on investment income for people above certain income levels.

IRS Topic 559 says: "A 3.8 percent net investment income tax (NIIT) applies to individuals, estates, and trusts." It lists the income thresholds as "$250,000 for married filing jointly or qualifying surviving spouse," "$125,000 for married filing separately," and "$200,000 for single or head of household." You can read [IRS Topic No. 559, Net Investment Income Tax](https://www.irs.gov/taxtopics/tc559) for the full rules.

Does it apply to real estate gains? Usually, yes. Topic 559 lists "net gains from the disposition of property such as stocks, bonds, mutual funds, and real estate" as net investment income. The law is at [26 U.S.C. §1411 at Cornell](https://www.law.cornell.edu/uscode/text/26/1411).

There are exceptions. For example, property held in certain active trades or businesses may be excluded. Real estate professionals sometimes fall into this group. Also, the tax only applies to the amount your income is over the threshold. That's why the calculator gives you a simple on/off switch. If you're not sure, leave it on for a conservative estimate and ask your CPA.

In our example, if the NIIT applies to the whole $640,000 gain, that's $24,320.

## How do state taxes affect a 1031 exchange?

State tax can be the biggest surprise of all. Many states tax capital gains, and some tax them at the same rates as wages.

California is a clear example. The California Franchise Tax Board says: "California does not have a lower rate for capital gains. All capital gains are taxed as ordinary income." You can read that on the [Franchise Tax Board's capital gains and losses page](https://www.ftb.ca.gov/file/personal/income-types/capital-gains-and-losses.html). That means a California seller's state rate depends on their income bracket, just like their salary.

Other states have no income tax at all. Some have flat rates. Some have special rules for out-of-state property. A few states track your deferred gain even after you move away. Because the rules vary so much, the calculator lets you enter your own state rate.

Most states follow the federal 1031 rules, so a valid exchange usually defers state tax too. But not every state matches federal law in every detail. Check with your CPA for your state.

In our example, say you enter a 9% state rate as a round hypothetical. On a $640,000 gain, that's $57,600.

## How much tax could a 1031 exchange defer? A worked example

Let's put all four layers together. This is the same hypothetical example we've been building. It matches what the calculator above will show if you enter these numbers.

**The facts (hypothetical):**

- Purchase price: $600,000
- Capital improvements: $50,000
- Depreciation taken: $150,000
- Sale price: $1,200,000
- Selling costs: $60,000
- Federal capital gains rate: 20%
- NIIT applies: yes (3.8%)
- State rate: 9%

**Step 1: Adjusted basis.** $600,000 + $50,000 − $150,000 = $500,000.

**Step 2: Gain.** ($1,200,000 − $60,000) − $500,000 = $640,000.

**Step 3: Depreciation recapture.** The smaller of $150,000 and $640,000 is $150,000. At 25%, that's $37,500.

**Step 4: Capital gains tax on the rest.** $640,000 − $150,000 = $490,000. At 20%, that's $98,000.

**Step 5: NIIT.** $640,000 × 3.8% = $24,320.

**Step 6: State tax.** $640,000 × 9% = $57,600.

**Step 7: Total.** $37,500 + $98,000 + $24,320 + $57,600 = **$217,420.**

Here's the same result as a table.

| Tax layer | What it's figured on | Rate used | Estimated tax |
|---|---|---|---|
| Depreciation recapture (unrecaptured §1250 gain) | $150,000 | 25% | $37,500 |
| Federal long-term capital gains | $490,000 | 20% | $98,000 |
| Net investment income tax | $640,000 | 3.8% | $24,320 |
| State income tax | $640,000 | 9% | $57,600 |
| **Total tax a full exchange could defer** | | | **$217,420** |

So in this example, a taxable sale would leave you with about $217,420 less to reinvest. That's about 19% of the $1,140,000 you netted from the sale. With a full 1031 exchange, that money can stay invested in your next property, at least for now.

Remember, this is an estimate. Real tax returns have many more moving parts. Your CPA confirms the actual number.

## Selling and paying tax vs. doing a 1031 exchange

Here's how a straight sale compares with a full exchange, using the same example.

| Question | Taxable sale | Full 1031 exchange |
|---|---|---|
| Tax due this year | About $217,420 | Generally $0, if all rules are met |
| Money left to reinvest | About $922,580 | About $1,140,000 |
| Can you spend the cash freely? | Yes | No, it must go into like-kind real estate |
| Deadlines | None | 45 days to identify, 180 days to close |
| Basis in the new property | Its full purchase price | Carries over from the old property |
| Tax in the future | Only on new gains | On old gain plus new gains, unless deferred again |
| Paperwork | Normal sale | Qualified intermediary, Form 8824, and exchange documents |

Neither path is right for everyone. Some people want the cash. Some want to stop owning real estate. Others want to keep their money working and are fine with the rules. The point of the calculator is to show you what's at stake so you can decide with your CPA.

## What is carryover basis in a 1031 exchange?

Here's the trade-off you make in an exchange. You don't pay tax now. But your old basis moves into your new property. This is called **carryover basis**.

The law says the basis of the new property "shall be the same as that of the property exchanged," then adjusts it for any money received and any gain recognized. That's from Section 1031(d).

Let's use our example. Say you reinvest the full $1,140,000 into a new property. Your basis in the new property is not $1,140,000. It starts at $500,000, the old adjusted basis. If you add more cash or take on more debt, your basis can go up from there. The Form 8824 instructions say the figure on line 25 "is your basis in the like-kind property you received in the exchange."

Why does that matter?

- **Your deferred gain is still there.** In our example, $640,000 of gain is now built into the new property. If you sell it later in a taxable sale, that gain comes due along with any new gain.
- **Your depreciation may be lower.** Because your basis is lower, your future depreciation deductions may also be lower than if you'd bought the property with fresh cash. Rules on this can get technical, so ask your CPA.
- **You can exchange again.** Many investors do one exchange after another. Each time, the gain keeps rolling forward.

This is why people say a 1031 exchange is a deferral, not a gift. The tax is postponed, and the bill gets bigger as gains pile up. That can be a good trade, but it's a trade.

## What happens to deferred gain at death? The step-up in basis

This is the part of the tax code that makes many investors use exchanges for decades. I'll explain it plainly. This isn't tax or estate advice, and your situation may be different.

When someone dies, the people who inherit their property generally get a new basis in it. Under [26 U.S.C. §1014](https://www.law.cornell.edu/uscode/text/26/1014), the basis of property acquired from a decedent is generally "the fair market value of the property at the date of the decedent's death." This is often called a **step-up in basis**.

What does that mean in practice? Say a property is worth $1,500,000 when the owner dies, but the owner's carryover basis was only $500,000. The heirs' basis generally becomes $1,500,000. If they sell soon after for about that amount, there may be little or no gain to tax. The deferred gain from earlier exchanges may never be taxed as income.

A few important cautions:

- Estate tax is a separate tax. A step-up in basis doesn't mean no estate tax.
- The rules have exceptions. How you hold title, community property rules, trusts, and other details can change the result.
- Tax law can change. Congress has debated changes to both 1031 exchanges and the step-up in basis in the past.

If this matters to your plans, talk with an estate planning attorney and your CPA. They can tell you how it applies to your family.

## How does tax deferral compound over time?

Deferral matters because of what the deferred money can do while it stays invested. Let's look at a simple hypothetical.

Say you defer $200,000 of tax. That $200,000 stays in your real estate instead of going to the IRS. Assume, just for this example, that it earns 5% a year and you reinvest everything.

- After 1 year: $210,000
- After 5 years: about $255,300
- After 10 years: about $325,800

If you'd paid the tax up front, that $200,000 and its growth would be gone. With deferral, you still owe the tax someday, unless something like a step-up in basis changes that. But in the meantime, the money works for you.

Here's how to think about it. It's a bit like an interest-free loan from the government, for as long as you keep deferring. The longer the deferral, the more it can be worth.

Two honest warnings. First, the 5% is made up for the example. Real estate values and income go up and down. You can lose money, and returns are never guaranteed. Second, deferral isn't worth much if the replacement property is a poor investment. Never let a tax deadline push you into a bad property.

## How to estimate your 1031 tax deferral, step by step

Here's how I'd suggest using the calculator above, one step at a time.

### Step 1: Gather your purchase records

Find your closing statement from when you bought the property. You need the purchase price. Your CPA can tell you which closing costs to add.

### Step 2: Add up your capital improvements

Look through your records for major projects: roofs, HVAC, additions, remodels. Don't include ordinary repairs. If you're not sure, your depreciation schedule from your tax return often lists improvements.

### Step 3: Find your total depreciation

Your tax returns show the depreciation you took each year. Your CPA can give you the total. This number is often bigger than people expect, especially on a property held 10 or 20 years.

### Step 4: Estimate your sale price and selling costs

Use a realistic price, not a hopeful one. Then estimate commissions, title, escrow, and transfer taxes. If you already have an offer, use those numbers.

### Step 5: Pick your federal capital gains rate

Choose 0%, 15%, or 20% based on your expected income for the year of the sale. Remember that the sale itself adds to your income. If you're not sure, try 20% for a conservative estimate.

### Step 6: Decide whether the NIIT applies

If your income in the year of sale will be above the threshold for your filing status, leave the NIIT on. Most people selling a sizable rental will be above it that year.

### Step 7: Enter your state rate

Use your expected marginal state rate. If your state has no income tax, enter zero.

### Step 8: Review the total with your CPA

The total is an estimate of the tax a full exchange could defer. Bring it to your CPA. Ask what's missing and how the real number might differ.

### Step 9: Plan the exchange before you close

If the numbers make an exchange worth it, set it up before your sale closes. You'll need a qualified intermediary in place first. A **qualified intermediary** is a neutral party that holds your sale money so you never touch it. My guide on [how I build a 1031 exchange solution](/writing/how-i-build-your-1031-exchange-solution) walks through the planning side.

## How to use the calculator

The calculator above runs the same kind of math as the worked example in this guide. You fill in eight boxes, and it shows you an estimate of the tax a full exchange could defer. Here's what each box means and where to find the number.

### What each input means and where to find it

- **Purchase price.** This is what you paid for the property. You'll find it on the closing statement from when you bought it. If you inherited the property or got it in an earlier exchange, your starting basis may be different, so ask your CPA for the right figure.
- **Capital improvements.** This is the total you spent on big projects that added value or extended the property's life, like a roof, an addition, or new systems. Your depreciation schedule, which is part of your tax return, often lists these. Leave out routine repairs.
- **Depreciation taken.** This is the total depreciation you've deducted over the years you've owned the property. It's on your tax returns, usually on the forms for your rental income and depreciation. Your CPA can give you a single total. If you've owned the property a long time, expect this number to be large.
- **Sale price.** This is what you expect to sell for. Use a signed offer if you have one. If not, use a realistic estimate from a broker.
- **Selling costs.** These are the costs to sell, such as commissions, title, escrow, and transfer taxes. Your broker or escrow officer can estimate them.
- **Federal capital gains rate.** Pick 0%, 15%, or 20%. Base it on your expected taxable income in the year you sell, including the gain itself. Many sellers of larger properties land in the 20% bracket for that year.
- **NIIT applies.** Turn this on if your income in the year of sale will be above the threshold for your filing status, such as $250,000 for married couples filing jointly. If you're not sure, leave it on for a more conservative estimate.
- **State tax rate.** Enter the state rate you expect to pay on the gain. In a state like California, which taxes gains as ordinary income, that's your income tax bracket. In a state with no income tax, enter zero.

### How to read the results

The calculator shows a few numbers. Here's what they tell you.

- **Adjusted basis** is your purchase price plus improvements, minus depreciation. It's your starting point for figuring the gain.
- **Gain** is what you net from the sale after selling costs, minus your adjusted basis. If that comes out below zero, the calculator shows zero gain and zero tax.
- **Depreciation recapture** is the tax on the part of your gain that came from depreciation. The calculator taxes that part at 25%, the maximum rate.
- **Capital gains tax** is the tax on the rest of your gain at the federal rate you chose.
- **NIIT** is the 3.8% tax on your gain, if you turned it on.
- **State tax** is your state rate on the gain.
- **Total** is the sum of all four. That's the estimated tax a full 1031 exchange could defer.

### A worked example in plain words

Say you bought a building for $600,000, put $50,000 into a new roof and windows, and took $150,000 of depreciation over the years. You expect to sell for $1,200,000 and pay $60,000 in selling costs. You pick the 20% federal rate, leave the NIIT on, and enter a 9% state rate as a round example.

The calculator first works out your adjusted basis. You paid $600,000 and added $50,000, but depreciation took away $150,000, so your basis is $500,000. You net $1,140,000 from the sale, so your gain is $640,000.

Next, it looks at depreciation. Since you took $150,000 of depreciation and your gain is bigger than that, the whole $150,000 counts as recapture. At 25%, that's $37,500. The other $490,000 of gain is taxed at your 20% rate, which is $98,000.

Then it adds the NIIT. That's 3.8% of the full $640,000 gain, or $24,320. Your state takes 9% of the gain, which is $57,600.

Add those up, and the calculator shows a total of **$217,420**. That's the estimated tax you could defer by doing a full exchange instead of a taxable sale. It's about 19% of what you netted from the sale.

### Try a few scenarios

The calculator is most useful when you play with it. Try these:

- **Change the federal rate** from 20% to 15% to see how much your bracket matters.
- **Turn the NIIT off** to see how much that 3.8% adds.
- **Change the state rate** to zero to see how big a part your state plays.
- **Double your depreciation** to see how a longer hold raises your tax.

Each change shows you which part of the tax bill is biggest for you. That's a good place to start your talk with your CPA.

### What the calculator simplifies

To keep it easy to use, the calculator makes a few simplifying choices:

- It uses 25% on all depreciation recapture. That's the maximum rate. Your actual rate on that part could be lower.
- It uses one federal rate on all the remaining gain. In real life, your gain may straddle brackets.
- It applies the NIIT to the whole gain. In real life, the tax applies only to the amount over your threshold, and some owners are exempt.
- It applies your state rate to the whole gain. Some states treat depreciation or out-of-state property differently.
- It doesn't model ordinary-income recapture, installment sales, suspended passive losses, or alternative minimum tax.
- It assumes a full exchange. If you take cash or reduce your debt, part of your gain may be taxable. My [1031 boot calculator](/tools/1031-boot-calculator) helps you estimate that.

Estimate only; your CPA confirms.

## What is a partial 1031 exchange, and how is it taxed?

Not every exchange defers all of the tax. If you take some cash out or buy a cheaper property, you may have **boot**. Boot is anything you get in the exchange that isn't like-kind real estate, such as cash or relief from debt.

Boot is taxable, up to the amount of your gain. The rest of the gain is still deferred.

A simple example: Say you net $1,140,000 from the sale, but you only reinvest $1,000,000 and keep $140,000 in cash. Generally, that $140,000 is taxable gain. The other $500,000 of gain stays deferred.

To defer all of the tax, a common rule of thumb is to buy replacement property of equal or greater value, reinvest all of the net cash, and replace any debt you paid off with new debt or new cash. Your CPA and qualified intermediary can confirm what's needed in your case.

## Mistakes to avoid

Over the years, I've seen the same mistakes come up again and again. Here are the ones that cost people the most.

### Mistake 1: Forgetting about depreciation

Many sellers compare their sale price to their purchase price and think that's their gain. It isn't. Depreciation lowers your basis, which raises your gain. On a long-held rental, depreciation can add hundreds of thousands of dollars to your taxable gain.

### Mistake 2: Ignoring state tax

Some owners focus only on federal tax. In a high-tax state, the state bill can be one of the largest pieces. Don't leave it out of your planning.

### Mistake 3: Touching the sale money

If the sale proceeds land in your bank account, even for a day, the exchange can fail. Set up a qualified intermediary before you close.

### Mistake 4: Missing the deadlines

You have 45 days after the sale to identify replacement property and 180 days to close. The law ties both to "the date on which the taxpayer transfers the property relinquished in the exchange." Use my [1031 exchange deadline calculator](/tools/1031-exchange-deadline-calculator) to see your dates.

### Mistake 5: Letting the tax tail wag the dog

A tax deferral is only worth it if the new property makes sense. Don't overpay or buy a weak property just to save tax. A bad investment can cost more than the tax you deferred.

### Mistake 6: Accidentally creating boot

Taking even a little cash, or buying a property with less debt, can create taxable boot. Plan the numbers before you close.

### Mistake 7: Treating the calculator as the final word

The calculator is a starting point. It's not a tax return. Your CPA will know about details like suspended losses, prior exchanges, and state rules that change the result.

### Mistake 8: Waiting until the last minute

The time to start planning an exchange is before you list the property. That gives you time to look at replacement options, line up a qualified intermediary, and talk to your CPA.

## Can a DST be replacement property in a 1031 exchange?

Yes, it can. A **Delaware statutory trust**, or DST, is a trust that owns real estate. Investors buy fractional interests in it. The IRS addressed DSTs in Revenue Ruling 2004-86. The ruling says "A taxpayer may exchange real property for an interest in the Delaware statutory trust" described there, and if the other Section 1031 requirements are met, the exchange can qualify. You can read it in the [IRS Internal Revenue Bulletin 2004-33](https://www.irs.gov/irb/2004-33_IRB).

Some investors use DSTs to finish an exchange because they're already bought and can often close quickly. Others use them because they want to stop managing tenants. You can learn the basics in my guide to [what a Delaware statutory trust is](/writing/what-is-a-delaware-statutory-trust-dst).

DSTs have real downsides. They're illiquid, which means you usually can't sell your interest when you want. You have little control over the property. Distributions are not guaranteed. You can lose some or all of your investment. And most DSTs are offered only to **accredited investors**. The SEC says an individual can qualify with "Net worth over $1 million, excluding primary residence (individually or with spouse or partner)" or "Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years." See the [SEC's accredited investor page](https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors).

If you're curious what kind of income a DST might project, my [DST income calculator](/tools/dst-income-calculator) walks through how distributions work. And if you want to compare offerings, my guide on [how to choose a DST](/writing/how-to-choose-a-delaware-statutory-trust-dst) covers what I look at.

Some DSTs also have a path into a REIT later, through what's called a 721 exchange. That can end your ability to keep doing 1031 exchanges. My guide to [721 exchanges and UPREIT DSTs](/writing/what-is-a-721-exchange-upreit-dst) explains the trade-offs.

## What my data shows

I keep [detailed records on every DST offering I review](/data/dst-offerings). As of October 2026, my offering records cover 76 DST offerings from 38 sponsors. These numbers help put the tax side of an exchange into context, because the replacement property is what your deferred tax money will be invested in.

**The median minimum investment is $100,000.** Minimums range from $25,000 to $500,000, and 21 offerings (28%) start at $25,000. That matters for exchanges. If you have a small amount of leftover cash that would otherwise be taxable boot, a lower minimum may let you place it.

**Nearly half are all-cash.** 36 of the 76 offerings (47%) carry no debt. Among the leveraged offerings, the median loan-to-value is about 49%. **Loan-to-value**, or LTV, is the loan amount divided by the property's value. If you paid off a mortgage when you sold, a leveraged DST can sometimes help you replace that debt and avoid boot. An all-cash DST won't.

**The median projected year-1 distribution rate is 4.7%.** That's across the 71 offerings that published one. The range was 4.0% to 9.0%. These are sponsor projections, not promises. Distributions are not guaranteed.

**A 10-year hold is the most common.** 31 offerings project a 10-year hold. Others run 5 to 10 years or 7 years, and a few are 2-year programs. When the DST sells, you'll face the same tax choice again: pay the tax, or exchange into something new.

**Multifamily leads.** Of the 76 offerings, 31 (41%) are multifamily, 18 (24%) are industrial, and 15 (20%) are net lease, including energy royalty programs. If you're curious about those, my guide to [oil and gas royalties](/writing/what-are-oil-and-gas-royalties) explains how they work.

I also track more than 1,100 full-cycle 1031 DST investments for performance. Full cycle means the property was bought, held, and sold or otherwise exited.

## How I help with the tax side of an exchange

I'm Jerry Baker, [founder of Baker 1031 Investments](/about). I studied applied mathematics and applied statistics at Babson College. Before starting my firm, I worked in acquisitions, management, and development at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners, and Arbor Bay Capital Partners. I've been involved in more than $10 billion of real estate investment activity.

I'm not a CPA, and I don't give tax advice. What I do is help you see the numbers clearly so you can have a better talk with your CPA. Then, if a DST fits your plan, I help you review options. I explain why I'm considering each one, what I like, and where I have reservations. You can see [the offerings currently available](/invest) once you're approved to view them.

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora Securities.

## Frequently asked questions

### How much tax can a 1031 exchange save me?

A 1031 exchange doesn't save tax. It defers it. The amount deferred depends on your gain, your depreciation, your federal bracket, the NIIT, and your state. In the hypothetical example above, a $640,000 gain could have about $217,420 of tax deferred.

### Does a 1031 exchange defer depreciation recapture?

Yes, a full 1031 exchange generally defers depreciation recapture along with capital gains tax. The recapture doesn't go away. It carries into your replacement property through your lower basis.

### What is the depreciation recapture tax rate on rental property?

For most rental buildings, the depreciation part of your gain is "unrecaptured section 1250 gain." The IRS says it is taxed at a maximum 25% rate. Some accelerated depreciation can be taxed as ordinary income, so check with your CPA.

### Does the 3.8% net investment income tax apply to real estate sales?

Usually, yes, if your income is above the threshold for your filing status. The IRS lists gains from selling real estate as net investment income. Some property used in an active trade or business may be excluded.

### Does California tax capital gains differently?

Yes. The California Franchise Tax Board says California has no lower rate for capital gains and taxes all capital gains as ordinary income. So your California rate on the gain depends on your income bracket.

### How do I calculate my adjusted basis?

Start with your purchase price. Add capital improvements, like a new roof. Subtract the depreciation you've taken. The result is your adjusted basis, which you subtract from your net sale price to find your gain.

### What happens to my deferred gain if I never sell?

If you hold the property until death, your heirs generally receive a basis equal to fair market value at the date of death. This step-up can mean the deferred gain is never taxed as income. Estate rules are complex, so talk with an estate attorney and your CPA.

### Can I do a partial 1031 exchange?

Yes. If you take some cash or buy a property worth less, the part you don't reinvest is generally taxable as boot. The rest of the gain can still be deferred.

### Is the calculator's number exact?

No. It's an estimate that uses simple rules, like one federal rate and a 25% rate on all recapture. Your actual tax depends on your full return. Your CPA confirms the real number.

### Can I use a DST to complete my 1031 exchange?

DST interests can qualify as replacement property under Revenue Ruling 2004-86 if the exchange meets all Section 1031 rules. DSTs are illiquid, offer limited control, and distributions are not guaranteed. Most are only for accredited investors.

## Sources

- [26 U.S.C. §1031, Exchange of real property held for productive use or investment (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1031)
- [26 U.S.C. §1, Tax imposed, including §1(h) on capital gains (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1)
- [26 U.S.C. §1250, Gain from dispositions of certain depreciable realty (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1250)
- [26 U.S.C. §1411, Imposition of net investment income tax (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1411)
- [26 U.S.C. §1014, Basis of property acquired from a decedent (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1014)
- [IRS Topic No. 409, Capital gains and losses](https://www.irs.gov/taxtopics/tc409)
- [IRS Topic No. 559, Net investment income tax](https://www.irs.gov/taxtopics/tc559)
- [IRS Publication 544, Sales and Other Dispositions of Assets](https://www.irs.gov/publications/p544)
- [IRS Instructions for Form 8824, Like-Kind Exchanges](https://www.irs.gov/instructions/i8824)
- [IRS Internal Revenue Bulletin 2004-33, including Rev. Rul. 2004-86](https://www.irs.gov/irb/2004-33_IRB)
- [California Franchise Tax Board: Capital gains and losses](https://www.ftb.ca.gov/file/personal/income-types/capital-gains-and-losses.html)
- [SEC: Accredited investors](https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investors)

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Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact