How it works
A 1031 exchange defers capital-gains and depreciation-recapture tax when investment real estate is swapped for like-kind investment real estate — and the clause that punishes sloppy swaps is boot, any value you extract along the way. Cash boot is sale equity that never reaches the replacement property; mortgage boot arises when the new loan plus new equity falls short of the debt retired, effectively letting leverage leak out tax-free-looking but fully taxable. The safe harbors are mechanical: equal-or-up on price, equal-or-up on equity, equal-or-up on debt, with a qualified intermediary holding proceeds and 45-day identification and 180-day closing clocks running. This calculator walks your numbers through the waterfall — selling costs, payoff, freed equity, cash required into the replacement including buying costs — and isolates whatever boot remains. Taxable boot is charged a blended rate approximating federal gains treatment, state tax and recapture character; the headline output is the tax deferred, dollars that stay invested compounding inside the replacement instead of leaving with the closer. Perfectly executed exchanges defer everything. Partial ones defer most — and knowing the exact cost of pulling cash out is what turns temptation into an informed decision.
Formula
Equity = price − costs − payoff | Boot = max(0, equity − cash in) + max(0, old debt − new debt) | Deferred = gain-rate − boot-rate (blended 25%)
Tips
- Line up the qualified intermediary before listing — touching proceeds voids everything.
- Calendar the 45-day identification window the day the sale closes; it is unforgiving.
- To avoid boot entirely: buy equal or up, reinvest all equity, and replace or exceed the old debt.
- Buying costs count toward value but not toward equity reinvested — budget them separately.
- Boot is taxed first from recapture character; confirm your blended rate with a CPA before swapping.
Frequently asked questions
- What is boot in a 1031 exchange?
- Any exchange value you keep instead of reinvesting: cash left over after acquiring the replacement, or debt reduction when the new loan is smaller than the old. Here, rolling $230,000 of equity plus a bigger loan into a $500,000 replacement creates zero boot; pocketing $40,000 instead makes that $40,000 taxable immediately.
- How much tax does a 1031 exchange actually defer?
- Realized gain times your blended rate — here a $132,000 gain at an assumed 25% federal-state-recapture blend defers about $33,000. Deferral, not forgiveness: basis carries into the replacement, and recapture eventually bites unless another exchange follows, which is precisely why investors chain them across decades.
- Why did I owe tax despite doing an exchange?
- You took boot. Cash withheld from closing, a smaller replacement loan, or excess closing-season prorations all trigger partial recognition. Exchanges fail mechanically more often than legally: missed deadlines and touched proceeds forfeit everything. This waterfall shows exactly which lever created the taxable remainder.
- Does a 1031 exchange wipe out depreciation recapture?
- Not permanently — it defers recapture along with gain by rolling adjusted basis forward. The replacement inherits your old basis plus new improvements, so accumulated recapture waits inside the new property's math. Chain enough exchanges and hold until death, and heirs receive a stepped-up basis that erases the deferred bill entirely under current law.
- Can I pull cash out of a 1031 exchange tax-free?
- Never during the exchange itself — extracted value is boot, taxed immediately regardless of the swap's overall success. Investors wanting cash typically refinance the replacement after closing, which is debt proceeds rather than exchange value. Sequence matters enormously: exchange first, borrow later, and document both arms separately.