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Depreciation×0.25+Realized Gain−Depreciation×Federal Rate%100+Realized Gain×NIIT%+State Rate%100

Real Estate · Tax

1031 Exchange Tax Deferral

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Use it before listing an investment property: it adds depreciation recapture, federal long-term capital gains tax, the 3.8% net investment income tax, and state tax into the bill a 1031 like-kind exchange would push into the future.

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Interactive workbench

Selling a rental held for years

Depreciation×0.25+Realized Gain−Depreciation×Federal Rate%100+Realized Gain×NIIT%+State Rate%100

A $500,000 sale with $30,000 of costs against a $270,000 adjusted basis is a $200,000 gain: $12,500 recapture, $22,500 federal, $7,600 NIIT, and $10,000 state, so $52,600 is deferred by a 1031 exchange.

Step 1 of 9

Variables and units

  • Sale Price

    Contract price of the property being sold.

    currency

  • Selling Costs

    Commissions, closing, and transfer costs paid on the sale.

    currency

  • Original Purchase Price

    What you paid for the property, including acquisition costs.

    currency

  • Capital Improvements

    Improvements added to basis (roof, additions, systems), not repairs.

    currency

  • Depreciation Taken

    Total depreciation claimed (or allowable) while you owned it.

    currency

  • Federal Capital Gains Rate

    Your federal long-term capital gains bracket: 0, 15, or 20.

    percent

  • Net Investment Income Tax

    3.8 if your income is above the NIIT threshold, otherwise 0.

    percent

  • State Tax Rate

    Your state's tax rate on capital gains; 0 if none.

    percent

Common mistakes

  • Forgetting that depreciation lowers basis and is recaptured at up to 25%.
  • Counting repairs as capital improvements.
  • Assuming a 1031 defers everything when some cash (boot) is taken out.

Step-by-step example

Selling a rental held for years

  1. 1. Start with the example inputs

    • Sale Price$500,000
    • Selling Costs$30,000
    • Original Purchase Price$300,000
    • Capital Improvements$20,000
    • Depreciation Taken$50,000
    • Federal Capital Gains Rate15%
    • Net Investment Income Tax3.8%
    • State Tax Rate5%

  2. 2. Apply the formula

    Depreciation×0.25+Realized Gain−Depreciation×Federal Rate%100+Realized Gain×NIIT%+State Rate%100

  3. 3. Run the numbers

    $52,600.00

    A $500,000 sale with $30,000 of costs against a $270,000 adjusted basis is a $200,000 gain: $12,500 recapture, $22,500 federal, $7,600 NIIT, and $10,000 state, so $52,600 is deferred by a 1031 exchange.

What this result means

$52,600.00 is the estimated tax bill on selling this property outright — and the amount a full 1031 exchange would defer by rolling every dollar of proceeds into like-kind property. The tax is deferred, not forgiven: it carries into the replacement property's basis. Any cash or debt relief you keep (boot) is taxed in the year of sale, and strict 45-day identification and 180-day closing deadlines apply, so confirm the plan with a CPA or qualified intermediary.