$650,000 in Taxes or $2,000 a Year? What 30 Minutes With a 1031 Exchange Calculator Showed One Investor

See these calculators in action — live walkthrough April 15. Free tools for financial advisors, QIs, and DST sponsors at 1031TaxHub.com.

Scott was referred to Exchange Planning Corporation by his Qualified Intermediary. He’d purchased his home in 2015 for $2.2 million, and by late 2023 the property was worth around $4.5 million. Scott no longer wanted to live in the house, but selling it outright came with a serious problem: even with the $500,000 Section 121 exclusion that he and his wife qualified for, the estimated tax bill was roughly $650,000.

Scott decided to rent the property while he figured out his next move. That bought him time — but it also started a clock. The Section 121 exclusion requires that you’ve used the home as your primary residence for at least two of the last five years. Every month Scott waited as a landlord, he moved closer to losing that $500,000 benefit permanently.

The Three Questions

When Scott sat down with Exchange Planning Corporation, he needed answers to three very specific questions:

1. How much tax will I pay if I just sell?
2. I’m earning $20,000 to $30,000 a year after expenses on this rental — can I do better?
3. If I earn more income, will I end up paying a lot more in taxes?

These are the same questions Exchange Planning Corporation hears from investors every week. The good news is they’re answerable — and the answers usually favor exchanging.

What the Numbers Showed

We started putting Scott’s information into the Exchange Planning Corporation calculators available at 1031TaxHub.com. These are the same tools we make available to financial advisors, Qualified Intermediaries, and DST sponsors to help their clients understand the tax consequences of their decisions.

After about 20 minutes, we had three scenarios side by side:

Scenario 1 — Sell and don’t exchange: Scott would pay an estimated $650,000 in taxes. That’s capital gains, state tax, depreciation recapture, and the 3.8% Medicare surtax combined. The 121 exclusion helps, but on a $2.3 million gain, there’s still a lot of taxable profit left over.

Scenario 2 — Keep the rental property: Scott avoids the tax from the sale, but he will lose the opportunity to save about $150,000 in taxes from using the 121 exclusion. Scott will also miss out on an estimated $250,000 of future tax savings over the next five years. Of course, this assumes he can increase the rent and control expenses to improve his income from where it is today.

Scenario 3 — Structure a tax-efficient exchange: Using a separate Exchange Planning Corporation calculator report, we showed Scott how he could structure his exchange to generate roughly $152,000 per year in projected income while paying an estimated $2,000 per year in taxes. That’s an estimated $67,000 a year in tax savings compared to keeping his current rental — driven by the projected income, depreciation, and appreciation of the replacement properties.

How DSTs Fit Into the Picture

Scott had been researching DSTs on his own, and he had good questions about whether they might work for his situation. We walked through a few options, including putting half the money into a new property he’d manage himself and the other half into DSTs.

DSTs can be a strong fit for an investor like Scott — especially for the passive income and diversification benefits. One question that often comes up in these conversations is whether DST reserves count as boot. The short answer is that it depends on the structure, but it’s worth understanding before you commit to a replacement property. We covered that question in detail here.

Whether Scott goes with DSTs, buys a property directly, or does a combination, the tax efficiency of the exchange is what drives the savings. Exchange Planning Corporation’s calculators, when used by exchange professionals, let you compare these options side by side so you can see exactly how each structure affects income, taxes, and total return.

Why 30 Minutes Matters

We talked to Scott for about 30 minutes total. It would be difficult for anyone to make a decision about what to do with over $4 million in one conversation, and Scott didn’t try to. But he walked away from the meeting with something most investors don’t have: a clear, numbers-based picture of his options and what each one costs him in taxes every year.

That’s the point of Exchange Planning Corporation’s calculators. They don’t make the decision for the investor — they make sure the investor has the information to make the decision themselves. And when Scott is ready to move forward, we’ll be here to help with the exchange documentation, depreciation optimization, and everything that comes after closing.

What This Means for Exchange Professionals

If you’re a financial advisor, Qualified Intermediary, or DST sponsor, your clients are asking these same questions. Exchange Planning Corporation’s calculators at 1031TaxHub.com let you answer them in about 30 minutes — with a professional report your client can take home and review.

The tools are free. You don’t need to be a tax expert to use them — Exchange Planning Corporation handles the analysis. You ask the questions.

This is the same approach we used with Leo, Lili, and Mike. In every case, the investor walked away knowing more about their options than they did going in — and in most cases, the numbers made a strong case for exchanging.

Register for our April 15 live calculator walkthrough to see how these tools work in real time.

Frequently Asked Questions

Can you really combine a Section 121 exclusion with a 1031 exchange? Yes. If you convert a primary residence to rental use and sell while you still meet the two-out-of-five-year occupancy requirement, you can exclude up to $250,000 ($500,000 for married couples) under Section 121 and defer the remaining gain through a 1031 exchange. The key is timing — the longer you rent without living in the property, the closer you get to losing the exclusion.

How long can I rent my former home before I lose the Section 121 exclusion? You must have used the property as your primary residence for at least two of the five years immediately before the sale. If you moved out in 2023, for example, you’d need to sell by 2026 to stay within the five-year window. The clock doesn’t pause.

Can I exchange into DSTs when combining Section 121 and 1031? Yes. The portion of gain that isn’t covered by the Section 121 exclusion can be deferred through a 1031 exchange into any qualifying replacement property, including DSTs, direct real estate, or a combination. Exchange Planning Corporation’s calculators can compare these options side by side.

How does Exchange Planning Corporation’s calculator work? The calculators at 1031TaxHub.com are free tools designed for exchange professionals and their clients. After answering a few questions about the property being sold, the calculators generate reports showing estimated taxes without an exchange, projected income and taxes with an exchange, and side-by-side comparisons of replacement property options. The whole process takes about 30 minutes.

What does Exchange Planning Corporation do after the exchange closes? Exchange Planning Corporation specializes in post-closing exchange documentation — analyzing closing statements, calculating adjusted basis, optimizing depreciation, and delivering CPA-ready reports. This is the work that happens after the Qualified Intermediary’s job ends and before the tax return is filed. Every engagement includes Exchange Planning Corporation’s Audit Assurance Warranty.