Your 1031 tax savings hinge on six inputs: purchase price, depreciation taken, sale price, filing status, income, and state. Get one wrong and the estimate can be off by tens of thousands of dollars. The number only holds up if it accounts for all four tax layers, not federal capital gains alone.
A rough estimate captures one tax out of four
Sell an investment property in California after years of depreciation, and the tax can top 35% of your gain. Not the 15% or 20% that comes to mind when you hear "capital gains."
That familiar rate is only one of four taxes a property sale can trigger. The California figure stacks federal capital gains on top of depreciation recapture (a federal rate up to 25%), the 3.8% net investment income tax, and state income tax.
The distance between a back-of-napkin estimate and an accurate one runs $40,000 to $80,000 on a typical exchange. That gap is often what decides whether an exchange is worth its effort and constraints.
The four tax layers
Every investment property sale can trigger four separate taxes:
Tax | Rate | What it applies to |
|---|---|---|
Federal long-term capital gains | 0%, 15%, or 20% | Gain above your adjusted basis (rate depends on taxable income) |
Depreciation recapture | Up to 25% (maximum rate) | The depreciation you claimed (or should have claimed) during ownership |
Net investment income tax (NIIT) | 3.8% | Applies to the lesser of net investment income or the amount by which modified adjusted gross income (MAGI) exceeds $200K (single) / $250K (married filing jointly) |
State income tax | 0% - 13.3% | Varies by state; some states tax gains as ordinary income, others have preferential rates, nine states have no income tax |
A 1031 exchange defers all four. That's why the total is typically larger than a capital-gains-only estimate: you're counting four taxes, not one.
How to find your adjusted basis
Your adjusted basis is the IRS's measure of what you have invested in the property, and it sets how much gain you'll owe tax on.
Start with your original purchase price. Add capital improvements - anything that adds value, extends the property's life, or adapts it to a new use: a new roof, a kitchen renovation, an HVAC system, an addition. Routine repairs and maintenance don't count.
Then subtract accumulated depreciation. The IRS requires straight-line depreciation over 27.5 years for residential rental property and 39 years for commercial. Here's the trap: even if you never claimed depreciation on your returns, the IRS treats it as if you did.
Adjusted basis = Purchase price + Capital improvements - Accumulated depreciation
Example (simplified): You bought a rental for $400,000, with $80,000 allocated to land, which can't be depreciated. Over 12 years of ownership you put $35,000 into a new roof and updated electrical.
- Depreciable basis: $320,000 (building) + $35,000 (improvements) = $355,000
- Depreciation over 12 years: ~$154,909 (simplified; in practice, each improvement starts its own depreciation schedule from its placed-in-service date, and your CPA will calculate the precise figure)
- Adjusted basis: $400,000 + $35,000 - $154,909 = $280,091
Sell for $650,000 with $39,000 in selling costs, and your amount realized is $611,000. Subtract the $280,091 basis and your realized gain is $330,909. Of that, $154,909 is depreciation recapture (taxed at a rate up to 25%) and $176,000 is capital gain (taxed at your capital gains rate).
Putting all four layers together
Take the numbers above. The investor is married filing jointly, with $180,000 in other taxable income, living in Colorado (a 4.4% flat state tax). The gain pushes their MAGI to about $510,909 for the year of sale ($180,000 + $330,909).
Component | Amount |
|---|---|
Sale price | $650,000 |
Selling costs (6%) | $39,000 |
Amount realized | $611,000 |
Adjusted basis | $280,091 |
Total realized gain | $330,909 |
Depreciation recapture ($154,909 × max 25%) | $38,727 |
Federal LTCG ($176,000 × 15%) | $26,400 |
NIIT (3.8% × $260,909)* | $9,915 |
Colorado state tax (estimated ~4.4%) | $14,560 |
Total estimated tax | $89,602 |
*NIIT applies to the lesser of net investment income ($330,909) or the amount by which MAGI exceeds the $250,000 MFJ threshold ($510,909 - $250,000 = $260,909). The lower figure applies. Note: state tax estimates use top marginal rates as approximations and may vary based on your specific situation.
With an exchange, that roughly $89,600 stays invested instead of going to the IRS. Compounding at 6% a year, it would be about $160,000 after a decade.
You can run this with your own numbers in about 60 seconds in our 1031 exchange calculator. It handles all four tax layers, covers all 50 states, and asks for no email or signup.
Where estimates go wrong
Forgetting depreciation recapture. The costliest mistake. Investors tally their capital gain and ignore the recapture tax of up to 25% on the depreciation they claimed. On a property held 15 years or more, recapture alone can run $30,000 to $80,000.
Using the wrong capital gains rate. The 20% rate only kicks in above $613,700 in taxable income (married filing jointly, per the IRS 2026 inflation adjustments). Most investors land in the 15% bracket, and some retirees selling a modest rental qualify for the 0% rate.
Ignoring state tax. Nine states have no income tax. California taxes capital gains as ordinary income, up to 13.3%; New York, New Jersey, and Oregon all top 9%. On a $300,000 gain, the state-tax difference between Texas and California is roughly $40,000.
Skipping depreciation you should have claimed. The IRS uses "allowed or allowable" depreciation. Own a rental for 15 years and never claim depreciation, and the IRS still cuts your basis as if you had - so you lose the deductions and still get taxed on the recapture.
Confusing equity with gain. These aren't the same. Buy for $400,000 with a $300,000 mortgage, watch the property rise to $600,000, and your equity after paying off the loan is $300,000 - but your gain, after depreciation, could be $250,000 or more.
Basic vs. advanced mode
A basic calculation uses your purchase price, sale price, depreciation, filing status, income, and state. That covers most situations.
An advanced calculation adds capital improvements, selling costs (as a dollar figure or a percentage), your current mortgage balance (which drives boot - the cash or debt relief you take out of the deal, and the portion that stays taxable), the residential-versus-commercial depreciation distinction, and mixed-use allocations.
Our calculator offers both. Basic mode is the starting point; advanced mode is there if you've made significant improvements or want to model different sale prices.
Reading your number
The size of your estimated tax frames the tradeoff.
Under $25,000. The deferred tax is real money, but so are the constraints: a 45-day window to identify a replacement property, and the requirement that your proceeds stay in real estate. This is where those costs weigh most heavily against the savings.
$25,000 to $75,000. The amount is large enough that the decision usually turns on the non-tax questions - whether you want to stay in real estate, and whether you can find a replacement you actually want inside the deadline.
Over $75,000. The larger the deferred sum, the more it has to compound over a 10-to-20-year hold. The same constraints apply; there's simply more riding on them.
Whatever the number, take it to your CPA. The calculator gives you an estimate; your tax professional can refine it against your complete tax picture.
The four-layer stack - federal gains, depreciation recapture, NIIT, and state - means your real exposure is usually higher than a plain capital-gains estimate. Running the actual number lets you weigh an exchange against its constraints instead of guessing. [Try the calculator](/calculator); it takes about 60 seconds and asks for no email.
Frequently asked questions
How accurate is a 1031 exchange calculator?
A good calculator lands within 5-10% of your actual liability in most straightforward cases. Details like partial-year depreciation, the separate schedule each improvement runs on, and exposure to the alternative minimum tax (AMT) can move the figure. Confirm with your CPA before you make any final decision.
Does the calculator account for state taxes?
Ours does, and state tax is one of the most frequently overlooked pieces. On a $400,000 gain, a California seller faces roughly $53,000 in state tax alone; a Texas seller faces $0. That gap can change the entire calculus.
What if I don't know my exact depreciation?
Use the "Estimate for me" toggle in our [calculator](/calculator). It runs straight-line depreciation from your purchase price, land allocation (typically 20% for residential), and years held. For a more precise number, check your Schedule E returns or ask your CPA.
Should I use the calculator before or after talking to a specialist?
Before. Arriving at a consultation with your own numbers makes the conversation far more productive: you'll know whether you're looking at a $30,000 deferral or a $200,000 one, and that shapes every decision after it.
Can I calculate a partial exchange?
Yes. If you plan to take some cash out - boot - or buy a less expensive replacement property, advanced mode lets you model the tax on the boot portion against the deferred portion.