Short answer
On an $850,000 rental sale with $454,750 of gain, a taxable sale leaves about $418,728 of equity after roughly $156,022 of tax, while a full 1031 exchange keeps all $574,750 working in the next property, deferring the tax. The trade-off is strict deadlines and a lower basis in the replacement.
1. The example
Rental bought for $400,000 with $50,000 of improvements and $110,000 of depreciation. Sale at $850,000, selling costs of $55,250, mortgage payoff of $220,000. Assumed tax rates are 20% federal, 25% on recapture, 9.3% state and 3.8% NIIT. These are example rates, not yours.
| Item | Taxable sale | Full 1031 exchange |
|---|---|---|
| Realized gain | $454,750 | $454,750 |
| Tax due now | $156,022 | $0 |
| Equity to reinvest | $418,728 | $574,750 |
| Replacement basis | New purchase price | $495,250 on a $950,000 purchase |
The exchange keeps about 37% more equity working. That is the deferral, not a tax saving: the gain comes due when you eventually sell without exchanging again.
2. What you give up with an exchange
- Time pressure. You must identify replacements within 45 days and close within 180 days or your tax return due date, if earlier.
- Cash. Any cash you take out is boot and taxable. Under a taxable sale the cash is yours after tax.
- Property rules. Both properties must be real property held for investment or business use.
- Lower basis. The deferred gain reduces the replacement's basis, so future depreciation deductions are lower.
- Costs and paperwork. You need a qualified intermediary and must file Form 8824.
3. When a taxable sale may suit you better
- You want to take the cash out or leave real estate.
- You cannot find a suitable replacement in 45 days.
- Your gain is small, so the tax saved may not justify the cost and constraints.
4. Check your own figures
Enter your numbers in the calculator: the ledger shows both routes side by side, including boot and the tax if you fall short of full reinvestment. See how depreciation recapture works and how to choose a qualified intermediary.
5. Frequently asked questions
Is a 1031 exchange better than selling and paying tax?expand_more
It keeps more equity working in the next property by deferring the tax, but it has strict deadlines and limits. In our $850,000 example a full exchange keeps $574,750 versus $418,728 after a taxable sale.
Does a 1031 exchange eliminate capital gains tax?expand_more
No. It defers the tax. The deferred gain lowers the basis of the replacement property and becomes taxable when you sell without exchanging again.
What happens if I take cash out of a 1031 exchange?expand_more
Cash and other non-like-kind value you receive is boot and is taxable up to the amount of your realized gain.
Can I do a 1031 exchange on my main home?expand_more
No. It applies to real property held for investment or business use, not to a main home.