Like-kind exchange
1031 exchange
A 1031 exchange defers capital gains tax and depreciation recapture by rolling the proceeds of an investment-property sale into another investment property. The deadlines are strict and statutory: 45 days from closing to identify replacement property in writing, 180 days to close on it, and the proceeds must never touch your hands — a qualified intermediary holds them.
Deferred tax = (capital gain × capital gains rate) + (depreciation × 25%)
Worked example
Selling with $60,000 of gain and $80,640 of accumulated depreciation defers roughly $29,000 of federal tax into the next property.
Every example in this glossary uses the same deal: a $265,000 duplex renting for $2,650 a month, bought with 25% down at 6.75% over 30 years, producing $19,310 of net operating income.
The mistake to avoid
Related terms
- Capital expenditureCapital expenditure is money spent on components with a useful life longer than a year — roof, furnace, windows, a full kitchen.
- Cost basisCost basis is what the IRS considers you to have invested: purchase price plus capitalised closing costs plus improvements, less the land value for depreciation purposes and less depreciation already taken.
- Depreciation recaptureDepreciation recapture is the tax owed at sale on the depreciation you deducted along the way.
Back to the full glossary — 20 terms with formulas and worked examples.