What gets deferred
- Federal capital gains tax on the appreciated portion of the property.
- Depreciation recapture (currently up to 25% federal).
- The 3.8% Net Investment Income Tax, in many cases.
- State-level capital gains tax, depending on the state.
Deferral, not elimination
A 1031 exchange defers the tax liability — it does not eliminate it. The deferred gain carries into the new property as a lower cost basis. Many investors continue to exchange over decades, and the basis may eventually receive a step-up at death under current rules.
Always consult your CPA
Tax outcomes depend on individual facts. Always consult a qualified tax professional before initiating an exchange.