A 1031 Exchange is a powerful IRS-sanctioned strategy that lets real estate investors defer capital gains tax by swapping one investment property for another “like-kind” asset. This guide breaks down terminology, rules and processes so you can decide if a 1031 Exchange fits your wealth-building playbook.
With real estate markets heating up, more investors hunt for tax-deferral strategies. Headlines tout 1031 Exchanges as a way to preserve equity, diversify portfolios and reinvest profit without an immediate tax hit.
Section 1031 of the Internal Revenue Code, enacted in 1921, permits deferral of capital gains tax when proceeds from the sale of a business or investment property are reinvested into a qualified replacement asset.
By rolling proceeds directly—from the sale closing to a Qualified Intermediary (QI) and then into a new property—investors avoid recognizing gains immediately. Taxes are deferred until the new property is sold without a subsequent 1031 Exchange.
A 1031 Exchange lets you sell an investment property, use the full sale proceeds to buy another investment property of equal or greater value and defer paying capital gains taxes on the sale.
Whether you own a single rental or a portfolio of apartments, a 1031 Exchange can help you trade up, change market locations or consolidate holdings while deferring taxes.
Professionals can leverage 1031 Exchanges to advise clients on structuring purchases and sales that qualify for tax deferral.
Tax experts use 1031 Exchanges to optimize clients’ after-tax returns and align real estate transactions with broader financial plans.
Business properties or primary residences converted to rental or business use may qualify once they meet the “held for investment” requirement.
“Like-kind” is broadly defined: an apartment building can swap for retail space, raw land for a warehouse or a duplex for a strip mall. The key is investment or business use, not property type.
To qualify, both the relinquished and replacement properties must be held for productive use in a trade, business or held to generate rental or investment income.
Personal residences, dealer inventory, stocks, bonds and partnership interests do not qualify for a 1031 Exchange.
Execute a sale agreement, stipulating that proceeds will be held by a Qualified Intermediary (QI) to maintain IRS compliance.
The QI holds funds between transactions. Never touch sale proceeds directly—doing so disqualifies the exchange.
From closing, you have 45 calendar days to formally identify up to three potential replacement properties (or more under 200%/95% rules). Submit identification in writing to your QI.
You must acquire the replacement property(ies) within 180 days of the sale date or by your tax return due date, whichever comes first.
The QI transfers funds to purchase the replacement property. Your exchange is complete once the deed is recorded in your name.
The IRS demands a QI to ensure investors never have actual or constructive receipt of sale proceeds, preserving the tax-deferred status.
Expect flat fees ($750–$1,500) plus transaction costs. Services include document preparation, fund custody and exchange accounting.
Boot is non-like-kind value received—cash, debt relief or personal property. Any boot is taxable as gain in the year of the exchange.
Your basis in the new property equals the old property’s basis, adjusted for any additional investment. Depreciation recapture still applies on the relinquished asset.
Some states don’t conform to federal 1031 rules. Always confirm state transfer tax, recording fees and local compliance requirements.
The QI acquires the replacement property first, holding title until you sell the relinquished property within 180 days.
Also known as a build-to-suit exchange, funds are held by the QI to pay for improvements on the replacement property during the exchange period.
A simultaneous exchange closes both transactions on the same day. Delayed (most common) uses the 45/180-day structure.
Yes. As long as both properties are held for investment, raw land and multi-family units qualify as like-kind.
Deadlines are rigid. Missing either disqualifies the exchange—no extensions.
Yes. Direct receipt of sale proceeds voids the exchange under IRS rules.
Any boot (cash or debt relief) is taxed as gain in the year of the exchange.
New basis = old basis + any additional cash invested – any boot received.
You may face legal fees, title charges, recording fees and transfer taxes.
Possibly. Some states impose transfer taxes regardless of federal treatment. Always check state law.
1031 Exchanges offer significant tax-deferral advantages but require strict adherence to rules and timelines. Evaluate trade-offs between flexibility, liquidity and tax savings.
Before you sell or buy, align with a qualified intermediary and your tax professional to map out deadlines, documentation and financing to ensure a seamless exchange.
