Capital Gains Tax
The federal (and often state) tax on the profit from selling an investment property — what a 1031 defers.
Definition
Capital gains tax is owed on the profit when you sell an appreciated asset. For investment real estate held over a year, the federal long-term rate is generally 0%, 15%, or 20% depending on income, and a 3.8% net investment income tax can apply on top. Many states tax the gain as well. A 1031 exchange defers all of this — you pay no capital gains tax at the time of the exchange, rolling the gain forward into the replacement property.
Why it matters
Deferral is not forgiveness — the gain rides along in your carryover basis until a future taxable sale (or is potentially wiped out at death under current step-up rules). Rates and the 3.8% surtax change; confirm current numbers with your CPA.
Related terms
General education — not tax or legal advice. This explains how §1031 exchanges work in general terms and uses simplified assumptions. Rules and tax rates change and your situation is specific. Talk to a qualified CPA or tax attorney before you rely on any of it. See our full terms & legal notice.