Short answer: A 1031 exchange defers the tax on a rental's gain when you buy another investment property. You are taxed only on boot: cash you keep, plus loan payoff not replaced by a new loan or added cash. To defer it all, buy a property costing at least your net sale price and reinvest all the cash.
It uses the same formulas as FirstDoor's full deal score.
How a 1031 exchange defers the tax
Section 1031 lets you sell a rental and buy another investment property without paying tax on the gain now. The gain is not forgiven. It moves into the new property through a lower basis and comes due when you sell that one without another exchange.
The IRS rule is simple to say: you are taxed on the gain only to the extent you receive money or other property (IRS, Like-kind exchanges: real estate tax tips). That money or other property is called boot. You can't deduct a loss in an exchange.
Cash boot. Any sale cash you don't put into the new property. In a typical deferred exchange a qualified intermediary holds the cash between the sale and the purchase, and whatever is left over at the end is taxable.
Debt relief. Paying off a loan counts like receiving cash. Per the Form 8824 instructions, it is boot only to the extent it is more than the new loan you take on plus any cash you add. A bigger new loan can't offset cash you take out, though.
Boot = cash you keep + (old loan paid off − new loan − cash you add, if positive)Gain taxed now = the smaller of boot and your total gainBasis of the new property = its price − the gain you deferredThe gain you do recognize is taxed first as unrecaptured section 1250 gain (the depreciation part, at your rate up to 25%), then at the 0/15/20% rates, the same way our capital gains tax calculator figures a sale.
The rule of thumb that falls out of this: to defer all of it, buy a replacement that costs at least your net sale price (sale price minus selling costs) and put all of the cash back in. If the new loan is smaller than the old one, add cash to make up the difference.
The rules you have to meet
| Real property only | Since 2018, only real property held for business or investment qualifies. Property held mainly for sale (a flip) doesn't, and US property isn't like-kind to property outside the US. |
| Like-kind is broad | Real properties are generally like-kind whether improved or not, so a rental house can be exchanged for an apartment building or land held for investment. |
| 45 days to identify | Name the replacement property in writing within 45 days after you transfer the property you sold. |
| 180 days to close | Receive the replacement by the 180th day, or by your tax return's due date (with extensions) for that year if that comes first. |
| Not your home | A property used only as your personal residence doesn't qualify. If a rental was your main home for 2 of the last 5 years, section 121 may also exclude part of the gain. |
| Related parties | Exchanges with relatives or related companies have extra rules, including a 2-year holding requirement. |
| Report it | File Form 8824 with your return for the year of the exchange. |
All of these come from the IRS Form 8824 instructions. Miss a deadline and the sale is generally taxed as a normal sale.
Worked example
The defaults continue the example from our capital gains tax calculator: a rental bought for $200,000 with $3,000 of closing costs in basis and $59,055 of depreciation taken, sold for $279,000 with $16,740 of selling costs and a $138,316 loan paid off. Assumed for illustration: married filing jointly with $110,000 of other taxable income (the 22% bracket). For the replacement we used the US median home value of $360,600 (Census ACS 2024) and a loan sized so that all $123,944 of sale cash goes into it.
| Net sale price ($279,000 − $16,740) | $262,260 |
| Adjusted basis of the old rental | $143,945 |
| Total gain | $118,315 |
| Cash after paying off the $138,316 loan | $123,944 |
| Replacement price | $360,600 |
| New loan ($360,600 − $123,944) | $236,656 |
| Boot | $0 |
| Tax due now | $0 |
| Federal tax deferred | $21,881 |
| Basis of the new property ($360,600 − $118,315 deferred gain) | $242,285 |
The new property costs more than the $262,260 net sale price and every dollar of cash went in, so there is no boot and the whole $21,881 is deferred. The trade-off: the new property's basis is $242,285 instead of $360,600, so you'll have less depreciation to deduct and a bigger gain when you finally sell.
What happens when you keep some cash or trade down
Same sale, same $118,315 gain. Only the replacement changes:
| Choice | Boot (or gain) | Tax now | Tax deferred |
|---|---|---|---|
| Buy the median home, reinvest all the cash (the default) | $0 | $0 | $21,881 |
| Same, but take $30,000 of cash out | $30,000 | $6,600 | $15,281 |
| Trade down to a $240,000 property, all cash reinvested | $22,260 | $4,897 | $16,984 |
| Sell and skip the exchange | $118,315 | $21,881 | $0 |
Taking $30,000 out makes $30,000 of the gain taxable now ($6,600), all of it as depreciation gain at 22%. Trading down to $240,000 leaves $22,260 of debt relief that isn't replaced, which is taxed the same way as cash.
What this calculator leaves out
It handles one property sold and one bought. It does not model state income tax, exchange costs paid with outside cash, personal property or furniture received, reverse or improvement exchanges, partial home use under section 121, related-party rules, how the new basis splits between land and building, or the alternative minimum tax. Qualified intermediaries charge fees, so get a quote and add it to your selling costs. This is an estimate, not tax advice, so work with a CPA and a qualified intermediary before you list the property.
Frequently asked questions
How do you calculate boot in a 1031 exchange?
Boot is cash you receive and do not reinvest, plus net debt relief: the old loan paid off minus the new loan you take on and any cash you add, if that is positive. Extra new debt can offset debt relief but not cash you keep.
How much do I have to reinvest to avoid all tax in a 1031 exchange?
Buy a replacement that costs at least your net sale price (sale price minus selling costs) and put all of the sale cash into it. If the new loan is smaller than the old one, add your own cash to cover the gap.
What are the 1031 exchange deadlines?
You must identify the replacement property in writing within 45 days after you transfer the property you sold, and receive it by the earlier of 180 days or your tax return due date including extensions, per the IRS Form 8824 instructions.
What is the basis of the replacement property after a 1031 exchange?
Roughly its price minus the gain you deferred. A lower basis means less depreciation each year and a larger taxable gain when you eventually sell without another exchange.
Can I do a 1031 exchange on my house?
Not on a property used only as your personal residence. A rental or other investment property can qualify. If it was your main home for 2 of the 5 years before the exchange, section 121 may also exclude part of the gain.
What does this calculator leave out?
State tax, multiple properties, reverse or improvement exchanges, personal property received, partial home use, related-party rules and AMT. It is an estimate, not tax advice.