How Much Does a 1031 Exchange Save on Taxes?

A 1031 exchange can defer tens or hundreds of thousands of dollars in taxes on a single real estate sale. Here is exactly how the math works in 2026, with real examples showing federal capital gains, the 3.8% NIIT, and depreciation recapture.

The Real Dollar Value of a 1031 Exchange

When investors ask how much a 1031 exchange saves, the answer depends on four variables: your capital gains, your income level, your depreciation recapture, and your state. But the range is significant. On a $1 million gain, a 1031 exchange can defer anywhere from $150,000 to $380,000 in taxes. That is not a small number, and it is the primary reason the 1031 exchange remains the most powerful wealth-building tool available to real estate investors.

This post walks through the exact math so you can calculate your own savings before deciding whether to sell outright or execute an exchange.

The Four Tax Layers on a Real Estate Sale

When you sell an investment property at a gain, you are potentially subject to four separate tax obligations:

1. Federal long-term capital gains tax. For property held more than one year, the federal rate is 0%, 15%, or 20% depending on your taxable income. In 2026, the 20% rate applies to single filers with taxable income above $533,400 and married filers above $600,050. Most active real estate investors selling appreciated property will fall into the 15% or 20% bracket.

2. Net Investment Income Tax (NIIT). The 3.8% NIIT applies to investment income for single filers with modified adjusted gross income above $200,000 and married filers above $250,000. Real estate investors who do not materially participate in their properties are typically subject to this tax.

3. Depreciation recapture. This is the most overlooked tax on real estate sales. When you depreciate a property over its useful life, the IRS taxes that depreciation back at a flat 25% rate when you sell. If you have owned a $500,000 building for 15 years and taken $272,727 in depreciation, you owe 25% of that amount ($68,182) in depreciation recapture tax, regardless of your income level.

4. State capital gains tax. Depending on your state, this can add 0% (Florida, Texas, Nevada) to 13.3% (California) on top of the federal tax.

A Real Example: $500,000 Gain

Assume you are a married investor in the 20% federal bracket selling a rental property with a $500,000 capital gain and $150,000 in accumulated depreciation. Here is what you owe without a 1031 exchange:

| Tax Component | Calculation | Amount | |---|---|---| | Federal capital gains (20%) | $500,000 x 20% | $100,000 | | Net Investment Income Tax (3.8%) | $500,000 x 3.8% | $19,000 | | Depreciation recapture (25%) | $150,000 x 25% | $37,500 | | Total federal tax | | $156,500 |

Add a 5% state tax and you are looking at $181,500 in total taxes on a $500,000 gain. That is 36% of your gain going to taxes before you can reinvest.

A 1031 exchange defers all of this. You reinvest the full $500,000 (plus your original basis) into the replacement property, and the $181,500 stays working for you.

A Larger Example: $1.5 Million Gain

For a higher-value transaction, the savings are proportionally larger:

| Tax Component | Calculation | Amount | |---|---|---| | Federal capital gains (20%) | $1,500,000 x 20% | $300,000 | | Net Investment Income Tax (3.8%) | $1,500,000 x 3.8% | $57,000 | | Depreciation recapture (25%) | $400,000 x 25% | $100,000 | | Total federal tax | | $457,000 |

With a 5% state tax on the capital gain, total taxes approach $532,000. A 1031 exchange defers all of it.

The Compounding Effect: Why Deferral Is More Powerful Than It Looks

The tax savings from a 1031 exchange are not just the deferred amount. They are the investment return on that deferred amount over time. If you defer $181,500 in taxes and invest it in a replacement property that appreciates at 6% annually, that $181,500 grows to $325,000 in 10 years. The government effectively gave you an interest-free loan of $181,500 for a decade.

This is why experienced investors use 1031 exchanges repeatedly, trading up into larger properties and deferring taxes indefinitely. When they eventually pass the property to heirs, the heirs receive a stepped-up basis, and the deferred taxes are eliminated entirely.

What a 1031 Exchange Actually Costs

The fees for a qualified intermediary are modest relative to the tax savings. A standard forward exchange typically costs $800 to $1,500 in QI fees. A reverse exchange runs $3,000 to $7,000 due to the Exchange Accommodation Titleholder structure. Even at the high end, the cost-to-savings ratio is exceptional.

When a 1031 Exchange May Not Be Worth It

A 1031 exchange requires reinvesting in a replacement property. If you want to cash out entirely, diversify into stocks, or have no interest in continuing to own real estate, a 1031 exchange is not the right tool. The exchange defers taxes; it does not eliminate them unless you hold the replacement property until death and your heirs receive a stepped-up basis.

For investors who are committed to staying in real estate, however, the math is almost always in favor of the exchange.

Calculate Your Own Savings

Use the 1031 Federal Exchange capital gains tax calculator to see your exact tax savings based on your property's gain, depreciation, income level, and state. Or schedule a free consultation with Steve Wolterman, CES, to walk through the numbers on your specific transaction.

Use the free calculator or call 513-586-6879 to speak with a qualified intermediary today.