What taxes does a 1031 exchange defer?
A 1031 exchange defers the federal capital gains tax on your profit, the depreciation recapture tax on the depreciation you previously deducted, the 3.8% net investment income tax where it applies, and typically your state capital gains tax as well. The gain isn’t erased — it carries forward into your replacement property until a future taxable sale.
Depreciation recapture is often the biggest surprise: on a long-held rental it can be taxed at up to 25% federally, higher than the long-term capital gains rate. Deferring it is a major reason exchanges pay off. See depreciation recapture and capital gains.
Because the deferred gain rides along in your carryover basis, it can be deferred again and again through successive exchanges, and under current law may be eliminated by the step-up in basis at death. Tax rates change — confirm current figures with your CPA. Estimate your potential deferral on the calculators.
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General education — not tax or legal advice. This explains how §1031 exchanges work in general terms and uses simplified assumptions. Rules and tax rates change and your situation is specific. Talk to a qualified CPA or tax attorney before you rely on any of it. See our full terms & legal notice.