The comparison that settles it
1031 Exchange Cost vs Paying the Tax
Hundreds of dollars on one side. Six figures on the other. It is worth seeing the components before spending an afternoon comparing setup fees.
The Easy1031 Exchange DeskReviewed September 8, 2026
The short answer
On a $500,000 gain, federal capital gains, depreciation recapture, net investment income tax and state tax together commonly total $125,000 to $175,000. A 1031 exchange defers all of it. The exchange itself costs $800 to $1,500 in intermediary fees, or $0 at Easy1031. The comparison is not close.
The four taxes you defer
People estimating what a sale will cost them usually think of one tax. There are four, and they stack.
| Tax | Rate | Applies to |
|---|---|---|
| Federal capital gains | 0%, 15% or 20% | The gain, at your income level |
| Depreciation recapture | 25% | Depreciation claimed while you owned it |
| Net investment income tax | 3.8% | Where the income thresholds are met |
| State income tax | 0% to 13.3% | Nothing in nine states, most in California |
Depreciation recapture is the one that catches people. Every year you owned the property you deducted depreciation against income. On sale, that benefit is recaptured at a flat 25%, separately from capital gains. On a property held fifteen years it is frequently the largest single line on the bill.
A worked example
A rental bought for $600,000 and sold for $1,150,000, held twelve years, with $160,000 of depreciation claimed. The owner is a high earner in a state with income tax.
| Line | Amount |
|---|---|
| Sale price | $1,150,000 |
| Adjusted basis after depreciation | $440,000 |
| Selling costs | $50,000 |
| Total taxable gain | $660,000 |
| Depreciation recapture at 25% | $40,000 |
| Capital gains at 20% on the remaining $500,000 | $100,000 |
| Net investment income tax at 3.8% | $25,080 |
| State income tax at 5% | $33,000 |
| Total tax if you simply sell | $198,080 |
What the exchange costs by comparison
A standard forward exchange on that same transaction costs $800 to $1,500 at a conventional intermediary, or $0 at Easy1031. The closing costs, title and escrow arrive either way, whether or not you exchange. So the marginal cost of deferring $198,080 is the intermediary fee, and nothing else.
Against what it costs
Put the two columns side by side and the argument about setup fees stops being interesting. A difference of $700 between two intermediaries is a third of one percent of the tax at stake.
Which is exactly why fee shopping is the wrong first question. The larger number is the interest your intermediary earns on your funds, and the more important one is whether your money is segregated and who stands behind it if the firm fails.
When it is not worth it
There are real cases, and it is worth naming them:
- Small gains. A $30,000 gain in a low bracket in a no-income-tax state might defer $6,000, against real costs and 180 days of deadline pressure.
- No replacement in mind. A failed exchange leaves you with the full tax bill and the fees. If you have not started looking, you are not ready.
- You want out of real estate. Deferral only helps if you are staying invested. If you want the cash, take it and pay.
- A loss on the sale. Nothing to defer, and a loss you may want to recognise.
The part people miss
Deferral is not just delay. The tax you did not pay stays invested in the replacement property and compounds there for as long as you keep exchanging. Two hundred thousand dollars working for another decade is a materially different outcome from two hundred thousand dollars paid in year one.
And under current law, heirs receive a stepped-up basis at death, which can eliminate the deferred gain altogether. That is a conversation for your CPA and your estate attorney, not a plan to build from a web page. But it is the reason serious investors exchange repeatedly rather than once.
Common questions about 1031 exchange cost and tax
Is a 1031 exchange worth the cost?
For almost any exchange of consequence, yes, and not by a small margin. Combined federal capital gains, depreciation recapture, net investment income tax and state tax commonly reach 25% to 35% of the gain. On a $500,000 gain that is $125,000 to $175,000 deferred, against an intermediary fee of $800 to $1,500, or $0 at Easy1031. The cost only becomes a genuine question on very small gains.
How much tax does a 1031 exchange defer?
Four separate taxes. Federal long-term capital gains at 0%, 15% or 20% depending on income. Depreciation recapture at 25% on the depreciation you claimed. Net investment income tax at 3.8% where the income thresholds are met. And state income tax, which ranges from nothing in nine states to over 13% in California. They stack, which is why the combined figure surprises people.
What is depreciation recapture and why does it matter?
Every year you owned the property you took depreciation deductions against your income. On sale, the IRS recaptures that benefit at a flat 25%, separately from capital gains. On a property held fifteen years this is often the largest single component of the bill, and it is the one investors most often forget when estimating what a sale will cost them.
Is a 1031 exchange ever not worth it?
On small gains, yes. If your gain is $30,000 and you are in a low bracket in a no-income-tax state, the deferred tax might be $6,000 against real costs and 180 days of deadline pressure. It also fails the test when you have no genuine replacement property in mind, because a failed exchange leaves you with the full tax bill anyway plus the fees.
Does a 1031 exchange eliminate the tax or delay it?
Defers it. The gain rolls into the basis of your replacement property and comes due when you eventually sell without exchanging. Two things change that. You can exchange indefinitely, deferring each time. And under current law, heirs receive a stepped-up basis at death, which can eliminate the deferred gain entirely. That is a plan to discuss with your CPA, not a rule to rely on from a web page.
The cheapest line on your settlement statement
Easy1031 charges nothing to set up a standard forward exchange, and pays you a share of the interest your funds earn while it holds them. Every other cost on this site still applies. This one does not.
- $0 on a standard forward exchange
- A share of the interest paid to you
- Segregated account, up to $175M FDIC
- $10M fidelity bond, $5M E&O