What is a 1031 exchange?
Section 1031 of the Internal Revenue Code allows a taxpayer to defer federal capital gains tax on the sale of investment or business-use real estate when the proceeds are reinvested into "like-kind" replacement property, following strict IRS rules and timelines.
Who can use a 1031 exchange?
1031 exchanges apply to property held for productive use in a trade or business or for investment. Primary residences and "flip" inventory generally do not qualify. Both the relinquished and replacement properties must be held by the same taxpayer.
What counts as "like-kind"?
For real estate, the like-kind requirement is broad: most U.S. investment real estate is like-kind to most other U.S. investment real estate. A rental house can be exchanged for a multifamily building, raw land, an industrial property, an NNN-leased asset, or a Delaware Statutory Trust (DST) interest treated as real estate for tax purposes.
Core requirements
- Use of a Qualified Intermediary (QI) to hold sale proceeds.
- Written identification of replacement property within 45 days of sale.
- Acquisition of replacement property within 180 days of sale.
- Equal or greater value, equity, and debt replacement to fully defer gain.
Common pitfalls
- Taking constructive receipt of sale proceeds (touching the money).
- Missing the 45- or 180-day deadlines.
- Failing to replace mortgage debt, creating "boot."
- Identifying property that does not close.
Ready to map your exchange?
Use our investor qualification tool to estimate your 45- and 180-day deadlines and explore replacement property options.
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