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 other gain taxed at 15% and about $81,222 of accumulated depreciation taxed at 25% could defer roughly $29,300 of federal tax into the next property.
Rental metric examples use the default $265,000 duplex at $2,650 monthly rent, 25% down and 6.75% over 30 years. Strategy and tax examples use the assumptions stated above rather than that rental deal.
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 starts with purchase price, capitalised closing costs and improvements.
- Depreciation recaptureDepreciation recapture is the tax owed at sale on the depreciation you deducted along the way.
Back to the full glossary — 21 terms with formulas and worked examples.