Investor Education
The 1031 Exchange Guide.
A 1031 exchange lets you sell an investment property and defer capital gains taxes by reinvesting the proceeds into like-kind replacement property. Done right, it's the most powerful tax deferral tool in real estate.
The Basics
What Is a 1031 Exchange?
Named after Section 1031 of the Internal Revenue Code, a 1031 exchange (also called a like-kind exchange or Starker exchange) allows real estate investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds into another qualifying property.
The key word is defer. You don't eliminate the tax — you push it forward, allowing your full equity to compound in the new asset. Many investors use serial 1031 exchanges throughout their career, deferring taxes indefinitely and building larger portfolios with each exchange.
At death, heirs receive a stepped-up basis, meaning the deferred taxes may never be paid. This makes the 1031 exchange not just a tax deferral tool but a generational wealth-building strategy.
The Rules
Key Requirements
Like-Kind Property
Both the relinquished and replacement properties must be held for investment or business use. "Like-kind" is broadly defined — you can exchange an apartment building for industrial property, farmland for an office building, or retail for a warehouse.
45-Day Identification Window
From the date you close on the sale of your property, you have exactly 45 calendar days to formally identify potential replacement properties. You can identify up to three properties regardless of value (the Three-Property Rule).
180-Day Closing Deadline
You must close on the replacement property within 180 calendar days of selling the relinquished property. No extensions. Missing this deadline means the exchange fails and taxes come due.
Qualified Intermediary Required
A Qualified Intermediary (QI) must hold the proceeds between the sale and purchase. You cannot touch the money. The QI ensures the exchange meets IRS requirements for valid tax deferral.
Equal or Greater Value
To defer all capital gains, the replacement property must be of equal or greater value than the property sold. Any cash or debt reduction you receive is called "boot" and is taxable.
Exchange Structures
Types of 1031 Exchanges
Forward (Delayed) Exchange
The most common type. Sell your property first, then acquire replacement property within the 45/180-day windows. Works when you have a buyer for your current property and need to find replacement assets.
Reverse Exchange
Buy the replacement property before selling your current one. More complex and expensive, but ideal when you've found the right asset and don't want to lose it while waiting for your property to sell.
Build-to-Suit (Improvement)
Use exchange funds to build or improve the replacement property. Useful when the right land or building needs construction or renovation to meet your investment criteria and value requirements.
Have a 1031 Exchange in Progress?
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