1031 Exchange vs. Sell Comparison
Deferral is not forgiveness. The case for an exchange is that the money you would have handed over in tax keeps earning for you instead — so the only honest comparison runs both positions over the same period and settles the deferred bill at the end. That is what this does, and the exchange still comes out ahead.
Your result
Exchanging comes out ahead
Exchanging leaves you $216,021 better off after 10 years, after settling the deferred tax at the end. It comes from putting $383,640 more to work on day one — the money that would otherwise have gone to the tax bill.
Advantage of exchanging
$216,021
As a share of the sell position
13.87%
Extra capital working from day one
The deferred tax. It is the entire source of the difference.
$383,640
If you exchange
Capital invested on day one
$1,380,000
Value after the holding period
$2,471,370
Growth
$1,091,370
Tax on selling at the end
At 28.8%.
$697,955
After tax, at the end
$1,773,415
If you sell and pay the tax
Capital invested on day one
$996,360
Value after the holding period
$1,784,329
Growth
$787,969
Tax on selling at the end
At 28.8%.
$226,935
After tax, at the end
$1,557,394
The tax you would pay on selling now
Total tax if you sell
$383,640
Gross proceeds
Amount realised less the loan paid off.
$1,380,000
What this comparison assumes
- The property was held more than a year, so the gain is long-term.
- Depreciation of the amount entered is recaptured at 25%, ahead of any capital gains rate — your 32% ordinary income rate, capped at the 25% ceiling on unrecaptured §1250 gain.
- Federal long-term capital gains at 20%, which you selected.
- Net investment income tax at 3.8% on the whole gain, including the recapture.
- State income tax at 5% on the full gain, with no preferential rate.
- No passive activity losses, installment treatment, alternative minimum tax or other income are taken into account.
- Both positions earn the same 6% a year for 10 years. If the replacement property performs differently from what you would otherwise have bought, this comparison moves with it.
- Both positions are sold at the end of the period and taxed at 28.8% on the gain since then.
- The deferred tax is paid in full at the end, at today's figure. Rates in force then are unknowable, and this makes no attempt to guess them.
- No step-up in basis is assumed. A step-up at death can eliminate the deferred tax entirely, which would make the exchange look considerably better than it does here.
- Rental income, depreciation on the replacement property, exchange fees and transaction costs on the eventual sale are all excluded.
Want the detail?
Both routes side by side with the full tax workings, the terminal tax settled, and every assumption written out — the paper to argue either way with.
Whether the advantage survives your actual transaction costs and your actual bracket is a conversation, not a calculation. We can introduce a CPA who has had it before.
Your result above is complete and stays on the page whether or not you fill this in.
Is a 1031 exchange worth it, or should I just sell and pay the tax?
Exchange or sell, compared over a holding period — with the deferred tax settled.