Real Estate Tax Calc
1. Engage a qualified intermediary before you sell
Set up your QI before closing the sale — they must receive the proceeds. If you take the cash first, the exchange is dead.
2. Sell and identify (45 days)
Close the sale; the QI holds the funds. Within 45 days, formally identify replacement property in writing (commonly up to three properties).
3. Close the replacement (180 days)
Purchase the replacement through the QI within 180 days of the sale. Reinvest all equity and match your old debt to fully defer the tax.
Step 0: Plan before you list
The best exchanges are set up before the relinquished property even hits the market. Confirm the property qualifies (held for investment or business, not a personal residence or flip), estimate your gain and the tax you're deferring, and start scouting replacement candidates early. Because the 45-day identification clock starts the day your sale closes, walking in with a shortlist dramatically reduces the risk of a rushed, bad purchase. Tell your closing agent and QI up front that this will be an exchange so the paperwork is ready.
The identification rules in detail
Your written identification within 45 days must satisfy one of three tests. The Three-Property Rule: identify up to three properties regardless of value — the most common choice. The 200% Rule: identify any number of properties as long as their combined fair market value doesn't exceed 200% of what you sold. The 95% Rule: if you blow past both limits, you must actually acquire at least 95% of the total value you identified. The identification must be unambiguous (a legal description or street address), signed, and delivered to the QI — not just to yourself.
Match value and debt to fully defer
To defer all of the tax, follow the "equal or up" principle: buy replacement property of equal or greater value, reinvest all of your net equity, and replace the debt you paid off (either with a new mortgage of equal size or by adding cash). Any value you don't replace, cash you pocket, or debt relief you don't offset becomes taxable boot. You can do a partial exchange and defer only part of the gain — just know the shortfall is taxed.
A worked example
You sell a rental for $500,000 with a $200,000 mortgage, leaving $300,000 of equity after the loan is paid, and you have a $150,000 gain. To fully defer: buy a replacement worth at least $500,000, put all $300,000 of equity into it, and carry at least $200,000 of new debt (or add cash to cover the difference). If instead you buy a $450,000 property and take $50,000 in cash out, that $50,000 is boot and is taxed — but the remaining $100,000 of gain stays deferred.
Reporting it: Form 8824
A 1031 isn't invisible to the IRS — you report it on Form 8824, Like-Kind Exchanges, filed with your tax return for the year the exchange began. The form walks through the properties, dates, realized gain, any recognized gain from boot, and your basis in the replacement. Keep your closing statements, the exchange agreement, and the identification notice; carryover basis calculations follow you until you eventually sell.
Common mistakes that blow the exchange
The classic failures: taking receipt of the proceeds (even briefly), missing the 45- or 180-day deadline (they don't extend for weekends or holidays and run concurrently), using a disqualified person as QI, identifying property incorrectly or too late, and trading down without realizing the shortfall is taxable. Because a single misstep can make the whole gain taxable, coordinate your QI, closing agent, and CPA from day one.
Know which type of exchange you're doing
"1031 exchange" covers several structures, and knowing yours shapes the steps. A delayed (forward) exchange — the most common — is the sell-then-buy sequence described above. A simultaneous exchange closes both legs the same day. A reverse exchange flips the order (buy first via an accommodation titleholder). An improvement/build-to-suit exchange uses exchange funds to construct or renovate the replacement while it's parked. Most investors do a delayed exchange, but if your timing or financing doesn't fit that mold, tell your QI early so they can set up the right structure.
Assemble your team early
A clean exchange is a team sport. Your QI handles the mechanics and funds; your CPA confirms the tax math, boot exposure, and reporting; your closing/title agent executes the deeds and coordinates with the QI; and your real estate agent sources replacement candidates within the 45-day window. Loop them all in before you list the relinquished property. The most expensive exchanges are the ones where the seller closes first and only then discovers they needed a QI in place beforehand.
The 180-day vs. tax-return deadline
One easily missed rule: your exchange period ends on the earlier of 180 days after the sale or the due date (including extensions) of your tax return for the year of the sale. So if you sell late in the year, you may need to file an extension to preserve the full 180 days. Filing your return early without an extension can inadvertently shorten your exchange window and force a rushed or failed closing.
After the exchange: track your carryover basis
Closing the replacement isn't quite the end. Your basis carries over from the relinquished property, adjusted for any new cash or debt added, and that figure drives your depreciation going forward and your gain when you eventually sell. Keep the Form 8824, both closing statements, and the basis worksheet permanently. If you chain exchanges, each one layers onto the last, so meticulous records are the only way to compute the eventual tax — or to substantiate the step-up your heirs may receive.
How boot is calculated and taxed
"Boot" is any non-like-kind value you receive, and it's the most common reason a 1031 is only partially tax-free. Cash boot is money you pocket rather than reinvest. Mortgage boot (debt relief) arises when the loan on your replacement is smaller than the loan you paid off and you don't offset the difference with new cash. Boot is taxed to the extent of your realized gain, and it draws first from the highest-taxed layers — meaning depreciation recapture can be recognized before capital gain. If you must take some boot, model exactly how much gain it triggers before you close, rather than being surprised at tax time.
Handling closing costs correctly
Not every closing cost can be paid from exchange funds without creating boot. Customary transactional expenses — the QI fee, title insurance, escrow fees, recording fees, real estate commissions, and transfer taxes — generally can be paid from proceeds without being treated as taxable boot. But non-exchange expenses like loan fees, prepaid interest, property taxes, insurance premiums, and security deposits are financing or operating costs; paying them with exchange funds can create boot. Have your QI and closing agent scrub the settlement statement so exchange dollars cover only qualifying items.
Backup identifications protect you
Since you may identify up to three properties (or more under the 200% rule), use that flexibility as insurance. Identifying a strong backup or two means a failed negotiation or bad inspection on your first choice doesn't automatically sink the exchange. Line up these alternatives during the 45-day window while you still can — you cannot add or change identified properties after day 45. Thoughtful use of the identification rules is one of the cheapest forms of protection against a failed, fully taxable exchange.
A checklist for a clean exchange
Pulling it together, a smooth 1031 usually follows this rhythm. Before listing: confirm the property qualifies, estimate the deferred tax, and begin scouting replacements. Under contract to sell: retain a QI and sign the exchange agreement before closing. At sale closing: the QI receives the proceeds; you never touch them. Days 1–45: deliver a written, unambiguous identification (using the three-property, 200%, or 95% rule) to the QI, including a backup. Days 45–180: close on the replacement through the QI, reinvesting all equity and replacing debt to avoid boot; file an extension if the sale was late in the year. At tax time: report on Form 8824 and record your carryover basis. Keep every document. Working the sequence in order — and starting early — is what separates a fully deferred exchange from an expensive surprise.
Handling the deposit and "good faith" money
A small logistical wrinkle trips up first-timers: what happens to the earnest money on the replacement purchase? Ideally, the QI funds the deposit from the exchange account so that exchange dollars — not your personal funds — go toward the property. If you must front the deposit personally to keep a deal alive, the QI can typically reimburse you at closing from the parked proceeds, keeping the transaction clean. Coordinate this with your QI in advance rather than improvising at the closing table, because how earnest money and other credits flow through the settlement statement affects whether any of it is treated as taxable boot.
Don't ignore the state-level exchange rules
Federal Section 1031 is only part of the picture. Most states conform and honor the deferral, but the mechanics can differ — some require their own withholding at the sale of in-state property (California, Colorado, and others withhold on sales by out-of-state sellers unless an exchange exemption is claimed), and a few impose clawback tracking when you exchange into another state. Ask your QI and closing agent whether any state withholding certificate or exemption must be filed at closing to avoid tax being withheld from proceeds you intend to reinvest. Handling this at closing is far easier than chasing a refund later.
Frequently asked questions
What's the first step in a 1031 exchange?
Engage a qualified intermediary before you close the sale — you can't touch the proceeds.
How long do I have to complete a 1031?
45 days to identify and 180 days to close, from the sale date. The periods run concurrently and don't extend for weekends or holidays.
What is the 3-property rule?
You may identify up to three replacement properties regardless of their value, or use the 200% rule (unlimited properties up to twice the sale value) or the 95% rule.
Do I have to reinvest all the money in a 1031?
To defer the full tax, yes — reinvest all equity, buy equal or greater value, and replace your debt. Any shortfall is taxable boot.
What form do I file for a 1031 exchange?
IRS Form 8824, Like-Kind Exchanges, filed with your return for the year the exchange started.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.