Real estate investors can use a 1031 exchange to avoid paying capital gains taxes on the sale of a property. In a 1031 exchange, the amount of capital gains that are deferred or taxable is based on the specifics of the transaction.
To understand how much of your capital gains can be deferred when exchanging real estate, enter in the details for all of the properties you’re selling (Relinquished Property) and buying (Replacement Property).
To perform a 1031 exchange, a real estate investor sells a property (or properties) and uses the funds to acquire new property that are similar. “Relinquished Property” represents all properties being sold and “Replacement Property” represents all newly acquired property during the exchange.
To fully defer all capital gains, the generic advice is to exchange “equal or up” - if the newly acquired property has a purchase price & mortgage amount that is the same or higher than the property being sold, all gains can be deferred. If this is not the case, your exchange may have “boot”, which just means some part of the transaction may trigger a taxable capital gain.
Our calculator can help you understand the amount of deferred gains, taxable gains, and types of boot in an exchange.
For each calculator input, use the total amounts for all properties sold as part of the exchange.
For each calculator input, use the total amounts for all properties bought as part of the exchange.
The Potential Gain On Sale is the expected capital gain realized on the sale of the relinquished properties. This incorporates the cost basis of the property and the gains net of any transaction costs.
The capital gains from the property sale have two components - the Deferred Gains and the Taxable Gains Remaining. The Deferred Gains value in the calculator represents any capital gain that is covered as part of the 1031 exchange - while deferred gains may need to be paid at some point in the future, they would not be taxed as part of this transaction.
Taxable Gains Remaining represent the portion of capital gains that could be deferred as part of the exchange, but given the scenario they are not offset by the replacement property and would be taxable. These taxable gains can be generated from Cash Boot or Mortgage Boot. Cash Boot occurs when some cash or property is either removed from the exchange or is ineligible property, resulting in a taxable gain. Mortgage Boot occurs when a loan on the relinquished property is paid off and is not replaced by either an equivalent loan or a new cash investment in the replacement property.