1031 Exchange Calculator

A 1031 exchange calculator is a great tool that can help you balance the costs of a 1031 exchange.

You'll enter details relative to the property sold along with information about the replacement property. The calculator then determines if exchange results in a capital gain or loss.

Homes sell for hundreds of thousands of dollars and there can be many costs associated with a like-kind exchange. Using a calculator ensures greater accuracy when working through the facts and figures.

This tool can be used before starting the exchange process to weigh up potential replacement properties. Or you can use it after completing an exchange to help with your reporting to the IRS.

Basically, a 1031 exchange refers to Section 1031 of the IRS's tax code. It involves the exchange of one investment property for another to allow investors to avoid capital gains that would otherwise have to be paid when the property is sold.

Most real estate properties are taxable when sold, but when 1031 exchange requirements are met, these taxes can be waived. The more money that can be saved, the more wealth you can build.

Example

Say you purchased a duplex for $200,000 and sold it for $400,000 a few years later. You'd essentially be making a $200,000 profit.

But that $200,000 would be subject to capital gains taxes, which means you'd have to pay a good chunk of money when Uncle Sam comes knocking.

The exact amount of taxes you'd have to pay depends on your income tax bracket. Regardless, a 1031 exchange can help you save whatever it is you'd have to pay.

You can then use that money towards your next investment, and so on and so forth.

After you sell an investment property, any gains realized are handed over to an intermediary.

The proceeds can never reach your account (or anyone that is non-arms length), or the 1031 exchange gets voided. That means even cousin Sue can't accept the profits on your behalf.

You then have a certain amount of time to find another investment property, seal the deal, and have your intermediary wire the capital gains to the title company involved.

Come tax time, you'd have to fill out IRS Form 8824.

For the full details, including timelines, see "How soon after do you need to buy another property?"

For a 1031 exchange to apply, you only have 45 days to identify a replacement property to purchase.

The swap must then take place within 180 days of selling the original property, or by tax time. Whichever is sooner.

Example

Say your property sold on December 26th, 2018. Six months (180 days) past that date is June 26th, but your tax return is due April 15th.

Since you are limited to the lesser of the two dates, your 1031 needs to be completed just shy of 4 months.

The specific time frame ensures that you're not pocketing and investing that cash elsewhere in an effort to benefit off the proceeds without paying your taxes on them first.

Instead, you'll have 180 days or less to find a property and purchase it for a 1031 exchange to take effect.

A 1031 exchange is all about avoiding taxes on any gains made on the sale of an investment property.

You can use our handy 1031 exchange calculator to calculate any gain (or loss) from the sale of an old property and the purchase of a new one. The concept isn't too difficult though.

You'll subtract your mortgage, adjustments, and 1031 costs from the price of the sold property. Then, you'll further subtract the cash used to purchase a replacement property.

If the final figure is negative, this means you've experienced a loss (aka, you added more to your investment). If it's positive, this is your gain from the transaction that is subject to income taxes.

Another rule under the 1031 exchange is that the swap must involve another piece of real estate. You can't take the proceeds from the sale and use that cash to go buy yourself a shiny new car.

Instead, the money made must be put directly into another "like-kind" piece of real estate. But the like-kind rule isn't any more stringent than that.

For example, you don't necessarily have to buy another office building if that's the kind of property you just sold. You can exchange that office building for two single-family homes or even a vacant piece of land if you want.

You can identify as many as three like-kind properties. Once you do, you will have to provide a letter of this identification to the intermediary taking care of your case.

A 1031 exchange is meant for business and investment properties only and cannot be applied to a personal residence.

That means you can't sell the home you live in for another and take advantage of a 1031 exchange.

If you want to keep all of your capital gains, the new property you buy needs to be worth at least as much or more than the initial property sold.

All of those profits must be entirely reinvested in the new property. If not, any difference will be taxable at your capital gains tax rate.

There are three different types of 1031 exchanges, each of which comes with its own benefits for specific situations:

Delayed 1031 Exchange

This type of 1031 exchange allows a property to be sold first, then find a like-kind property to replace it with. This is the most common type of 1031 exchange you'll see.

A delayed 1031 exchange can help you defer your capital gains taxes so you don't have to worry about paying taxes on any profits you make when you sell your original property.

Construction or 1031 Exchange

Also known as an "improvement" 1031 exchange, this type of 1031 exchange allows you to sell a property and use the profits from the sale to purchase another.

The new property can be of lesser value and whatever money is leftover can be used to renovate and update the place.

Reverse 1031 Exchange

The name says it all: this exchange allows you to purchase a new property first, then sell the original property later.

These are not very common and are usually used when the current market is slow. When the market starts to pick up again, you can then sell your original property to make a bigger profit while deferring capital gains taxes.

Paying taxes is never fun, but when it comes to profits made from the sale of an investment property, the IRS really comes through with the 1031 exchange.

To take advantage of this program, however, you've got to follow the rules. For this reason, we recommend consulting with a trusted tax professional before starting a 1031 exchange.

There are plenty of tools out there to help you navigate the world of capital gains, including the one on this page. Be sure to check out our comprehensive list of tools and calculators to help make your next investment a sound one!