Model 1031 exchange tax deferral scenarios comparing capital gains taxes saved versus reinvestment requirements and boot calculation.
This calculator runs a real estate like-kind exchange through the IRS boot mechanics: enter the relinquished property's sale price, adjusted basis, and mortgage balance, then the replacement property's purchase price and new financing. It computes realized gain, any cash or mortgage boot, the portion of gain you must recognize this year, and the portion deferred into your new basis. The detail most people miss: buying a replacement property for less than the sale price, or paying down debt without adding offsetting cash, creates taxable boot even when no cash actually lands in your pocket.
A concrete input and expected output from the current implementation.
Input
Relinquished property: sale price $500,000, adjusted basis $300,000, no existing mortgage. Replacement property: purchase price $450,000, paid all cash, no new loan. Combined federal + state capital gains rate: 20%.
Expected output
Realized gain: $200,000. Cash boot (proceeds not reinvested): $50,000. Recognized (currently taxable) gain: $50,000, taxed at $10,000. Deferred gain: $150,000, carried into the replacement property's basis, deferring $30,000 of tax.
Recognized gain is capped at the lesser of realized gain ($200,000) or boot ($50,000); because the replacement property cost $50,000 less than the sale price, that shortfall is boot and becomes immediately taxable, while the rest of the gain defers.
Boot is whatever isn't reinvested: cash you pocket at closing, plus mortgage boot, the amount your loan balance drops on the new property minus any new cash you contribute. The calculator nets these against each other, since adding cash to cover a smaller loan can offset debt relief and keep the exchange fully deferred.
Recognized, currently taxable gain is capped at the lesser of your realized gain or total boot, so you're never taxed on more than what you actually took out of the exchange. Everything above that recognized amount rolls into a reduced carryover basis on the replacement property, deferring tax until a future sale outside another exchange.
Not necessarily. You also need to replace or exceed the mortgage debt you gave up, or add cash to cover the difference, and acquire property of equal or greater value. Reinvesting all your cash while taking on less debt than before still creates mortgage boot even though no cash changed hands.
No. It assumes the properties already qualify. Since the 2017 tax law changes, like-kind treatment under Section 1031 applies only to real property, not personal or intangible property. Eligibility and timing rules are yours to verify with a qualified intermediary or tax advisor.
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