1031 Exchange Capital Gains Tax Calculator

Step 1 — Calculate Your Total Realized Gain

The IRS taxes realized gain, not the cash you walk away with at closing. Realized gain is the difference between your sale price and your adjusted cost basis — and depreciation you took during ownership reduces that basis, which increases the gain.

Example: you bought a small apartment building for $800,000, capitalized $0 in improvements, claimed $300,000 in depreciation over your hold period, and now have a buyer at $2,000,000. Your adjusted basis is $500,000, and your realized gain is $1,500,000 — even though you "only" doubled your money on paper.

Step 2 — Section 1250 Depreciation Recapture (25%)

Every dollar of depreciation you claimed during ownership lowered your taxable rental income, often at ordinary rates of 32–37%. When you sell, the IRS "recaptures" that benefit by taxing the portion of your gain attributable to depreciation — known as unrecaptured Section 1250 gain — at a maximum federal rate of 25%.

Recapture is the most surprising line for most sellers. In the example above, $300,000 of the $1,500,000 gain is recaptured at 25%, producing a $75,000 federal tax hit — separate from and layered on top of any long-term capital gains tax.

Step 3 — Federal Long-Term Capital Gains Tax (0% / 15% / 20%)

The portion of your gain above the recapture amount is taxed at preferential long-term capital gains rates, assuming you held the property more than one year. The 2026 brackets, set by IRS Revenue Procedure 2025-32, are:

These thresholds apply to total taxable income, not just the gain in isolation. The calculator stacks your long-term gain on top of any other ordinary income you provide, then applies each bracket to the portion of the gain that falls inside it. A gain large enough to span two brackets is taxed at a blended rate.

Step 4 — Net Investment Income Tax (NIIT, 3.8%)

Enacted in 2013 to help fund the Affordable Care Act, the Net Investment Income Tax is a 3.8% federal surtax on investment income — including capital gains, rental income, dividends, and interest — for taxpayers above certain income thresholds. Critically, those thresholds are not indexed for inflation, so they have steadily ensnared more middle-income sellers each year:

• Single / Head of Household: $200,000 MAGI
  

• Married Filing Jointly: $250,000 MAGI
  

• Married Filing Separately: $125,000 MAGI
  

NIIT is applied to the lesser of (a) your net investment income or (b) the amount your modified adjusted gross income exceeds the threshold. A large property sale almost always pushes a seller well past the threshold, so this 3.8% surtax typically applies in full to the entire gain.

Step 5 — State Capital Gains Tax

Most states tax capital gains as ordinary income, with rates ranging from 0% in nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming, and Missouri, which exempts capital gains specifically) to as high as 13.3% in California. Washington imposes a unique 7% tax on long-term capital gains above approximately $262,000. A handful of states — Arkansas, New Mexico, South Carolina, Vermont, and Wisconsin — provide partial exclusions for long-term gains, which the calculator accounts for by using effective rather than nominal rates.

The calculator applies each state's top marginal rate to the entire gain. For sellers below the top bracket, the actual state bill will be modestly lower — but for most investors selling a property that has appreciated meaningfully, the gain itself pushes them into the top bracket.

The Combined Picture: A California Example

Consider a married couple selling the building from our example above — sale price $2,000,000, original basis $800,000, depreciation taken $300,000, other taxable income $350,000 — in California:

• Realized gain: $1,500,000
  

• Federal long-term capital gains tax: $226,815 (blended 15% / 20% on $1.2M of post-recapture gain)
  

• Section 1250 recapture: $75,000 (25% on $300,000)
  

• Net Investment Income Tax: $57,000 (3.8% on $1,500,000)
  

• California state tax: $199,500 (13.3% top marginal)
  

• Total tax bill: $558,315 — an effective rate of 37.22% on the gain
  

A properly structured 1031 exchange defers every dollar of that $558,315. That capital stays invested as equity in the replacement property, where it continues to compound and generate income — and it can be deferred indefinitely through successive exchanges. When the investor passes away, heirs typically receive a stepped-up cost basis, eliminating the deferred gain entirely for estate-planning purposes.

What This Calculator Does Not Model

To keep the inputs simple and focused on the highest-impact variables, the calculator makes a few simplifications worth flagging:

• Alternative Minimum Tax (AMT) — large gain years can trigger AMT for some taxpayers, especially those with significant incentive stock option exercises or passive losses.
  

• State preferential treatment — Washington's $262,000 exemption, Massachusetts's 5% LT preferential rate, and various exclusion-state mechanics are approximated using effective top rates, not modeled bracket-by-bracket.
  

• Capital loss carryforwards — losses from prior years can offset gains dollar-for-dollar.
  

• Local taxes — New York City and Yonkers, for example, impose an additional ~3.876% city tax on top of the New York state rate.
  

• Installment sales, partial 1031 exchanges, and partnership / 1031 drop-and-swap structures — these common real-world transactions require individualized modeling.
  

For these reasons the figure above should be treated as a directional estimate, not a final tax calculation. Always work with a qualified CPA and 1031 attorney before transacting.

Why a 1031 Exchange Almost Always Wins the Math

When a real estate investor decides between selling outright and completing a 1031 exchange, the comparison is rarely about whether to pay the tax bill — it is about whether to defer it. Every dollar deferred remains invested. Over a 10-year hold at a 6% net return, $558,000 of deferred tax compounds to roughly $999,000 of additional equity. Over 20 years, it compounds to about $1.79 million.

Combined with stepped-up basis at death, this is why high-net-worth real estate families rarely sell outright. They exchange — often into Delaware Statutory Trust (DST) properties for the simplicity of passive ownership and the speed needed to meet the IRS's strict 45-day identification window.

Frequently Asked Questions