1031 Exchange Basics

Defer capital gains taxes when selling an investment property

What is a 1031 Exchange?

A 1031 Exchange, named after Section 1031 of the Internal Revenue Code allows real estate investors to sell an investment property and reinvest the proceeds into a new property while deferring capital gains taxes. Normally, when you sell investment property, you could lose 30-40% or more of your profit to federal and state taxes, depreciation recapture, and other tax obligations. A 1031 Exchange lets you defer those taxes by reinvesting your proceeds, keeping that money working for you instead of going to the IRS.

The key requirement is that you cannot touch the money, a Qualified Intermediary must hold the proceeds during the exchange period. Many investors use multiple 1031 Exchanges throughout their lifetime, continuously deferring taxes while building their portfolio. It's one of the most powerful wealth-building tools available to real estate investors.

Key Requirements

To fully defer taxes on capital gain or depreciation capture, the Exchanger must:

Acquire a "like kind" replacement property that will be help for investment or business purposes
Purchase a replacement property of equal or greater value
Reinvest all of the equity into the replacement property and;
The debt on your replacement must be equal to or greater than the deby on the property you cold. You can add cash to make up the difference, buy you cannot reduce your deby and replace it with cash. You also cannot receive any cash or benefits from the sale proceeds during the exchange.

Who Can Use a 1031 Exchange?

1031 Exchanges are available to:

Real estate investors with rental properties
Owners of commercial real estate
Business owners with investment property
LLCs, partnerships, and corporations

What Qualifies as "Like-Kind"?

Nearly any real estate investment can be exchanged for other real estate investments. For example, an apartment complex for office buildings, raw land for retail space, single rentals for multiple unites

What Doesn't Qualify:

Primary residences (your main home)
Fix-and-flip properties held for resale
Vacation homes used primarily personally
Non-real estate assets (stocks, bonds, equipment)