real-estate · 2026-05-01
Quantify the federal capital gains + depreciation recapture tax deferred by a 1031 exchange vs an outright sale.
| Sale price | $850,000 |
| Original cost basis | $400,000 |
| Total depreciation taken | $80,000 |
| Federal LTCG rate % | 20% |
| State capital gains rate % | 5% |
| Depreciation recapture rate % | 25% |
| Capital gains tax (deferred) | $90,000 |
| Depreciation recapture (deferred) | $20,000 |
| State tax (deferred) | $26,500 |
A 1031 exchange (Like-Kind Exchange) defers federal capital gains + depreciation recapture indefinitely if you roll proceeds into another investment property within 180 days. The tax bill on a typical investor sale is 25-35% of the gain — kicking that to the next sale, then the next, then never (step-up basis at death) is the most common path to compounding wealth in real estate.
adjusted basis = original basis − depreciation taken
total gain = sale price − adjusted basis
recapture amount = depreciation taken (capped at gain)
LTCG gain = total gain − recapture amount
tax = recapture × 25% + LTCG × 20% + state × full gainWhen you sold a rental, the IRS 'recaptures' the depreciation deductions you took along the way — taxing them at 25% (Section 1250 unrecaptured gain). Even if your overall gain qualifies for 20% LTCG, the depreciation portion gets the 25% rate. A 1031 defers both.
Yes. The 'like-kind' rule for real property is generous — exchange a CA fourplex for a TX commercial strip, totally fine. State income tax follows the property: when you eventually sell out (no 1031), you owe the source state's tax. CA has the 'clawback rule' to track that.
The difference is 'boot' and is taxable as gain. To fully defer, replacement value must be equal to or greater than relinquished property AND replacement debt must be equal to or greater than relinquished debt. Most investors trade up to maintain full deferral.