1031 Exchange Calculator and Depreciation Recapture Tax Calculator

How to calculate depreciation recapture tax, step by step

The depreciation recapture tax calculation has five steps, and the SealedFolio calculator above runs all five the moment you change an input. The figures below are the ones loaded into it by default, so you can follow along line by line.

1. Rebuild your adjusted basis. Original purchase price plus capital improvements minus depreciation allowed or allowable. $350,000 plus $25,000 minus $90,000 gives $285,000.
2. Work out the realized gain. Sale price minus selling costs is your amount realized, then subtract the basis. $600,000 minus $40,000 minus $285,000 gives $275,000.
3. Split the gain. The lesser of your accumulated depreciation and the total gain is unrecaptured Section 1250 gain. Here the full $90,000 of depreciation fits inside the gain, leaving $185,000 of long term capital gain.
4. Apply the rates. $90,000 at 25 percent is $22,500 of recapture. $185,000 at 20 percent is $37,000. State tax at 5 percent on the whole $275,000 adds $13,750, and the 3.8 percent net investment income tax adds $10,450.
5. Decide whether to defer it. The four pieces come to $83,700. A 1031 exchange with no boot postpones every dollar of that and carries your basis into the replacement property.

Step one is where most people get stuck, because the depreciation total has to come from somewhere. If you never tracked it, the SealedFolio rental property depreciation calculator rebuilds the year by year schedule from your purchase price, land allocation, and in service date, and the cumulative column is the number this page asks for.

Is depreciation recapture always taxed at 25 percent?

No, and the SealedFolio depreciation recapture tax calculator uses 25 percent because it is the ceiling rather than the going rate. Unrecaptured Section 1250 gain is taxed at your ordinary income rate, capped at 25 percent. A landlord whose top bracket is 22 percent pays 22 percent on the depreciation slice, not 25. Anyone at 32 percent or above pays the 25 percent maximum and no more.

Two things sit on top of whichever rate you land on: your state's tax on the gain, and the 3.8 percent net investment income tax if your modified adjusted gross income clears the threshold. The recapture slice counts as net investment income, so it is not exempt. The figures in the table are rough. The IRS works out the real number on the Schedule D Tax Worksheet, which stacks the gain on top of your other taxable income, so $90,000 of recapture can straddle two brackets rather than sit in one. The calculator on this page always prices the recapture line at the 25 percent maximum, and its rate fields do not change it, so treat that line as a ceiling if your bracket is under 25 percent.

Section 1250 and Section 1245 recapture are taxed differently

Depreciation recapture is really two rules wearing one name, and the SealedFolio calculator on this page models the Section 1250 version because that is the building. The split matters most to anyone who has run a cost segregation study, because that study is what moves basis out of the capped bucket and into the uncapped one.

A worked contrast: $40,000 of appliances and flooring pulled into 5 year buckets by a cost segregation study saves real money in years one to five, then comes back at 37 percent rather than 25 percent when you sell, a $4,800 swing on that $40,000. Front loading deductions is still often worth it, but price the exit before you order the study. The SealedFolio blog covers cost segregation and bonus depreciation in more detail.

How to avoid or defer depreciation recapture tax

There is no way to erase depreciation recapture while you are alive and selling for cash. There are four ways to move it, and the SealedFolio calculator above prices the first one directly.

• A 1031 exchange. A fully deferred like-kind exchange postpones the recapture along with the capital gain, $83,700 in the example above. Your basis carries over, so the recapture follows the money into the next property rather than vanishing.
• Hold until death. Heirs may receive a stepped up basis, which clears the deferred recapture along with the rest of the gain. That is the reason so many investors chain exchanges instead of cashing out.
• Sell in a low income year. Because the Section 1250 rate follows your ordinary rate under the 25 percent cap, a year with big losses or low ordinary income can cost you 22 percent instead of 25. On $90,000 of depreciation that is $2,700.
• Release suspended passive losses. Losses your rental accumulated but could not deduct are freed in the year of a fully taxable sale and can absorb part of the gain, including the recapture slice.

Three things people try that do not work. Skipping depreciation does not spare you, because the IRS recaptures depreciation allowed or allowable, so you pay on deductions you never took. An installment sale spreads the capital gain across the payment years but not the recapture: Section 1245 recapture is recognised in full in the year of sale, and unrecaptured Section 1250 gain is reported ahead of the rest of the gain, so the tax lands early while the cash arrives late. And moving back in does not clear it either, because the Section 121 home sale exclusion does not cover depreciation taken after May 6, 1997.

If none of those fit, the honest answer is to pay it. A deferral is not free: an exchange buys you a 45 day identification deadline, intermediary fees, and a carryover basis that shrinks depreciation on the replacement property. When the recapture at stake is $10,000 or $15,000, that trade is rarely worth the pressure of finding a property in six weeks.

Does depreciation recapture apply if you sell at a loss?

Depreciation recapture does not apply when there is no gain, and the SealedFolio calculator on this page is built that way: it taxes the lesser of your accumulated depreciation and your realized gain rather than the full depreciation figure. Sell the example property for $300,000 with $40,000 of costs and your amount realized is $260,000 against a $285,000 adjusted basis. There is no gain, so none of the $90,000 of depreciation is recaptured, and the $25,000 shortfall is a Section 1231 loss you report on Form 4797, usually deductible against ordinary income.

The partial case catches people out. Sell for $330,000 with $40,000 of costs and the gain is only $5,000, so recapture is $5,000 rather than $90,000, taxed at up to 25 percent for $1,250. Depreciation lowered your basis every year, so a sale that feels like a loss against your purchase price can still show a taxable gain on paper. Put the real numbers into the calculator on this page before you assume a down market means no tax.

The IRS rules behind depreciation recapture, and the forms

Four rules decide what the SealedFolio depreciation recapture tax calculator can and cannot save you, and all four come straight from the code and the forms.

• Allowed or allowable. Basis is reduced by the depreciation you were entitled to claim, whether or not you claimed it. Forgetting to depreciate costs you the deduction and still costs you the recapture.
• Section 1250 for the building. The depreciation portion of the gain on real property is unrecaptured Section 1250 gain, taxed at your ordinary rate up to a 25 percent maximum.
• Section 1245 for everything shorter. Appliances, equipment, and cost segregation components are recaptured as ordinary income with no rate cap.
• The forms. The sale goes on Form 4797, the result carries to Schedule D, and the 25 percent slice is computed on the Unrecaptured Section 1250 Gain Worksheet inside the Schedule D instructions. A like-kind exchange goes on Form 8824 for the year the sale closed, even when you owe nothing.

IRS Publication 544 covers sales and dispositions of assets, and Publication 527 covers residential rental property. Both are worth a read the year before you sell, not the April after. Meanwhile the rental income you reported year after year lives on Schedule E, and the SealedFolio Schedule E calculator and Schedule E guide cover the line items that feed the depreciation total you will need at sale.

What a 1031 exchange actually defers

A 1031 exchange defers depreciation recapture and capital gains tax together, which is the whole reason the SealedFolio calculator on this page runs the two columns side by side. Section 1031 of the tax code lets you roll the proceeds of one investment property into another without settling up with the IRS in between. Nothing is forgiven. The gain rides along on the new property through a carryover basis, and it keeps riding through every exchange after that. Investors who never sell for cash can push the bill out for decades, and property that passes to heirs may get a stepped up basis that clears it entirely.

Four separate taxes are sitting in a typical sale, and an exchange holds off all four: federal long term capital gains tax on the appreciation, unrecaptured Section 1250 tax at up to 25 percent on every dollar of depreciation you claimed, your state's tax on the gain, and the 3.8 percent net investment income tax. That fourth one surprises people. It is why the outright sale column above is usually worse than the mental math you did in the car.

How much capital gains tax will I pay on $300,000?

The federal tax on a $300,000 long term gain depends on your filing status and your other income, and it is the number the SealedFolio 1031 exchange calculator sets against a full deferral. The 2026 long term capital gains brackets in IRS Revenue Procedure 2025-32 tax gains at 0 percent up to $49,450 of taxable income for a single filer and $98,900 on a joint return, at 15 percent up to $545,500 single and $613,700 joint, and at 20 percent above that. The IRS sets the net investment income tax at 3.8 percent on modified adjusted gross income above $200,000 single or $250,000 married filing jointly.

Two things push a rental sale above those figures. Any depreciation inside the $300,000 is taxed as unrecaptured Section 1250 gain at up to 25 percent rather than 15, and your state adds its own rate. Other income stacks underneath the gain too, so a salary pushes more of it into the 15 and 20 percent bands. To model your own case in the SealedFolio 1031 exchange calculator, enter your real depreciation and a federal rate that matches your bracket. A fully deferred 1031 exchange with no boot postpones every line of this table.

What each field in the SealedFolio calculator means and where to find it

Every input the SealedFolio depreciation recapture and 1031 exchange calculator asks for comes off a document you already have: a closing statement, a depreciation schedule, or a loan payoff quote. Here is where each one lives.

• Sale price and selling costs. The contract price, then everything that comes off the top: agent commission, title, escrow, transfer tax, attorney fees. Subtracting them gives your amount realized, and skipping them is the most common way people overstate their own gain.
• Original purchase price and capital improvements. What you paid, plus the money you spent on things that added value or life, a roof, an addition, a full system replacement. Routine repairs do not belong here, they were already deducted the year you paid them.
• Accumulated depreciation. Every dollar written off since the property went into service. Use the allowed or allowable figure, because the IRS counts years you forgot to claim it. If you do not have the number to hand, the rental property depreciation calculator will rebuild the schedule for you.
• Mortgage paid off and new mortgage. The loan balance that clears at your closing, and the debt you take on the replacement property. The gap between them creates mortgage boot, which is the trap covered below.
• Cash you take out. Any proceeds that reach you instead of the intermediary. Even a small amount is taxable, so put the real figure in rather than a zero you are hoping for.
• The three rates. Federal capital gains defaults to 20 percent, the top long term bracket. Many sellers land at 15. The state field starts at 5 percent as a stand in, so change it to your own state's rate or set it to zero if your state does not tax the gain. Leave the net investment income tax at 3.8 unless your income is below the threshold where it applies, in which case set it to zero.
• Closing date. The day the property you are selling actually transfers. Both deadline clocks start there.

A worked example: recapture, capital gains, and the exchange

Take the numbers loaded in the SealedFolio calculator on this page. You bought a small apartment building for $350,000, put $25,000 into it, and have claimed $90,000 of depreciation. Adjusted basis: $285,000. You sell for $600,000 with $40,000 of selling costs, so the amount realized is $560,000 and the realized gain is $275,000. There is a $200,000 loan to pay off.

Sell it outright and the $90,000 of depreciation is taxed first, at 25 percent, for $22,500. The remaining $185,000 is taxed at 20 percent, another $37,000. State tax at 5 percent on the full gain adds $13,750, and the net investment income tax adds $10,450. That is $83,700 of tax, and you walk away with $276,300 in cash.

Exchange instead, take no cash out, and put at least $200,000 of new debt on the replacement, and there is no boot. The whole $83,700 stays in the deal. You go shopping with $360,000 of equity rather than $276,300, and your basis in the new property carries over rather than resetting. That difference compounds, which is the actual argument for an exchange. Whether the replacement property is worth buying is a separate question, and the cap rate calculator and cash-on-cash return calculator answer that one.

Boot: the part that still gets taxed

Boot in a 1031 exchange is anything you walk away with that is not like-kind real property, and the SealedFolio calculator on this page prices both kinds of it. Boot does not blow up the exchange. It just makes part of it taxable, and it comes in two flavours that behave very differently.

Cash boot

Money that reaches you rather than the replacement property. Pulling $30,000 out to redo a kitchen elsewhere, or leftover proceeds because the new property cost less than the old one. Cash boot is obvious, deliberate, and taxable up to the amount of your gain.

Mortgage boot

This is the one that catches people, because no money changes hands. If you pay off a $200,000 loan and only borrow $140,000 on the replacement, the IRS treats that $60,000 of debt relief as value received. You never saw a dollar of it, and you still owe tax on it. Bringing $60,000 of your own outside cash into the purchase cancels it out, which the calculator above does not model, so treat its mortgage boot line as a worst case.

How the tax on boot is worked out

You recognise gain equal to the total boot, capped at the realized gain. Depreciation recapture comes out of that recognised amount first at the 25 percent rate, which is the expensive end, and only what is left over gets the long term capital gains rate. So a small amount of boot is taxed harder than people expect. The rule of thumb that keeps you clean: buy equal or greater in value, move all of the equity across, and replace all of the debt you retired.

Partial 1031 exchange: the same sale with four levels of boot

A partial 1031 exchange is one where some boot is taxed now and the rest stays deferred, and the SealedFolio 1031 exchange calculator prices it from the cash out and new mortgage fields. These four scenarios all use the loaded example: a $275,000 gain, $90,000 of it depreciation, a $200,000 loan paid off, 20 percent federal, 5 percent state, and 3.8 percent net investment income tax.

The 45 day and 180 day deadlines

The two 1031 exchange deadlines are the ones the SealedFolio calculator on this page dates for you from your closing date. Both clocks start the day your relinquished property closes, and they run at the same time. Day 180 is not 180 days after day 45, it is 180 days after the sale. Calendar days, so weekends and holidays count, and if day 45 lands on a Sunday it is still day 45. There is no grace period and no extension, short of a federally declared disaster.

One extra catch on the back end: the 180 day window closes early if your tax return for the year of the sale is due before it. Close in November and your filing deadline arrives well inside the 180 days, so you file an extension or you lose the tail of your window. Put your closing date into the calculator above and it will give you both dates.

The dates in that table come from the SealedFolio 1031 exchange calculator and the statute itself. Section 1031(a)(3) ends the exchange period on the earlier of day 180 or the due date, with extensions, of your return for the year you sold, so the November closing needs an extension to use its full window.

By day 45 the identification has to be in writing, signed, and delivered to your intermediary. You get one of three ways to do it:

• Three property rule. Name up to three properties, at any price. This is what almost everyone uses.
• 200 percent rule. Name as many as you like, as long as their combined value is no more than twice what you sold for.
• 95 percent rule. Name any number at any value, but you then have to actually close on at least 95 percent of the total you identified. It is a fallback, not a plan.

What is the 95% rule in a 1031 exchange?

The 95 percent rule is the escape hatch in the 1031 exchange identification rules, and the SealedFolio 1031 exchange calculator's day 45 date is the deadline it works against. Treasury Regulation 1.1031(k)-1(c)(4) normally caps you at three properties of any value, or any number whose combined value does not exceed 200 percent of what you sold. Go past both limits and the identification still holds only if you receive identified property worth at least 95 percent of the aggregate fair market value of everything you identified before the exchange period ends.

In numbers, using the $600,000 sale from the SealedFolio example: the 200 percent rule lets you list up to $1,200,000 of property. List five buildings worth $2,000,000 together and you now have to close on at least $1,900,000 of them by day 180. Lose one deal to a failed inspection and the whole identification can fail, which is why almost nobody chooses this route on purpose.

What is the 2 year rule for 1031 exchanges?

The 2 year rule in a 1031 exchange usually means the related party rule, and the SealedFolio 1031 exchange calculator assumes you pass it. Under Section 1031(f), if you exchange property with a related person, such as a close family member or a company you control, and either of you disposes of the property from that swap before 2 years after the last transfer in the exchange, the deferral is lost and the gain is taxed after all.

A second 24 month test covers vacation homes and other dwelling units you sometimes use yourself. IRS Revenue Procedure 2008-16 gives a safe harbor if you own the unit for at least 24 months before the exchange (or after, for the replacement), and in each of those two 12 month periods you rent it to others at a fair rental for 14 days or more and keep your own use to no more than the greater of 14 days or 10 percent of the days it was rented.

Outside those two cases the statute sets no fixed minimum holding period for a 1031 exchange. The test is whether you held the property for investment or business use, so a quick resale looks like a flip, and a flip is inventory rather than like-kind property. SealedFolio records the acquisition date for each property, which is the first thing an intermediary asks for when the holding period is in question.

The four kinds of 1031 exchange

A 1031 exchange comes in four structures, and the SealedFolio calculator on this page is built around the first one, which is what most sellers use.

• Delayed, also called forward. Sell first, then buy inside the 45 and 180 day windows. The standard structure and the one this calculator is built around.
• Reverse. You buy the replacement before you sell. An exchange accommodation titleholder parks title on one of the two properties while you unwind the other. More expensive, and it usually needs cash or a lender comfortable with the structure, because you are carrying both.
• Improvement, sometimes called build to suit. Exchange proceeds pay for construction on the replacement property while the intermediary holds title. Only work completed inside the 180 days counts toward the value you have to match.
• Simultaneous. Both closings on the same day. Rare now, and one delayed signature can void the whole thing.

What is like-kind, and what is not

Like-kind is the test that decides whether the deferral the SealedFolio calculator on this page shows is available to you at all, and the phrase misleads a lot of first timers. Like-kind is broad, not narrow: nearly all United States real property held for investment or business use trades for nearly all other United States real property. A duplex for farmland, a strip centre for a self storage facility, a leasehold with 30 years left for a fee simple lot. Quality, grade, and location do not matter.

What is out: the home you live in, a second home you mostly use yourself, property you bought to flip, because that is inventory rather than an investment, partnership interests, and foreign real estate swapped for domestic. Personal property has been excluded since the 2017 tax law, so equipment, vehicles, and artwork no longer qualify. Note too that several states, California among the better known, track the deferred gain when you exchange into an out of state property and come looking for it when you eventually sell.

Reporting a 1031 exchange: Form 8824 and the intermediary

A 1031 exchange only defers depreciation recapture if two things outside the SealedFolio calculator are right, regardless of how good your numbers are.

First, a qualified intermediary has to hold the proceeds from the moment your sale closes. If the money touches your account, even overnight, it is a taxable sale. The intermediary also cannot be a disqualified person, which rules out your attorney, CPA, real estate agent, or employee if they have acted for you in the past two years. Line one up before you go under contract, not after.

Second, file Form 8824 with your return for the year the sale closed, even if you owe nothing at all. It records the transfer and identification dates, the values on both sides, any boot, and the carryover basis. Meanwhile the replacement property picks up where the old one left off on your Schedule E: the carried over basis keeps depreciating on the original schedule, and only the extra you paid above the old property's value starts a fresh one. The Schedule E guide covers how that lands on the return.

Is it better to pay capital gains tax or do a 1031 exchange?

A 1031 exchange usually beats paying the capital gains tax if you plan to buy another investment property, because the tax stays invested with you. In the example loaded in the SealedFolio 1031 exchange calculator, selling and paying $83,700 of tax leaves $276,300 to reinvest, while an exchange with no boot puts $360,000 of equity into the next property. At a 7 percent cap rate, which the SealedFolio cap rate calculator will check for any deal, that extra $83,700 would be earning $5,859 a year before debt.

A 1031 exchange is not always the right answer, though, and plenty of people start one they should have skipped. Run the numbers in the SealedFolio calculator on this page against these five honest cases before you commit.

• The gain is small. If you have owned the property three years and the deferred tax is $15,000, intermediary fees plus the extra closing work eat a real share of that, and you have bought yourself a 45 day deadline.
• You are actually done investing. An exchange only defers. If you want out of real estate, the tax is coming either way, and a chain of exchanges just delays a bigger bill.
• You would have to overpay to hit the deadline. Buying a mediocre property in week six to avoid a tax bill is how investors trade one problem for a longer one.
• Your income year is unusually low. A year with big losses or low ordinary income can put you in a lower capital gains bracket, and paying the tax then can beat deferring it into a higher one.
• You want to keep depreciating aggressively. Carryover basis means a smaller depreciation deduction on the new property than a fresh purchase would give you. See how depreciation works and the wider list of rental property deductions before you decide.

Tracking cost basis and depreciation across multiple rental properties

Every number the SealedFolio 1031 exchange and depreciation recapture calculator asks for is a record you were supposed to keep, per property, for as long as you owned it. SealedFolio is a desktop portfolio tracker built for that job: the data file lives on your own machine rather than a vendor's cloud database, and each property carries its own running history. Four fields are the ones that decide your recapture bill.

• Original cost basis, split between land and building, because only the building depreciates.
• Capital improvements, dated, with the routine repairs kept separate so they are not double counted.
• Accumulated depreciation, year by year, on the allowed or allowable basis rather than what you remember claiming.
• In service date and holding period, which set the schedule and the long term capital gains treatment.

Spreadsheets manage this fine for one property and start drifting at four, usually because an improvement gets logged in the wrong year and nobody notices until a sale. SealedFolio keeps the same figures current for every property in the portfolio, so the inputs on this page are a lookup rather than an evening of digging through closing statements. See SealedFolio for investors for how the portfolio view works, or the SealedFolio guide to the best rental property software if you are still comparing tools.

Frequently asked questions