Sell one investment property, buy another, and defer the capital-gains tax — if you follow the rules exactly. Here's how a 1031 exchange works.
Named for Section 1031 of the tax code, it lets you sell investment real estate and roll the proceeds into other investment real estate without paying capital-gains tax now — the tax is deferred, not erased, and rides along in your new property's basis.
"Like-kind" is broader than it sounds: for real estate, nearly any investment or business property exchanges for any other. A warehouse can become land, a rental duplex can become an industrial condo, one building can become three. What doesn't qualify: your primary residence, property held mainly for resale (flips), and — since 2018 — anything that isn't real property.
Why investors bother: deferring the tax keeps your full equity compounding in the next property. Repeated over a career — and combined with the stepped-up basis heirs receive — deferral can become permanent. That endgame is exactly why the details matter.
Both clocks start the day your sale closes, run in calendar days, and — outside federally declared disasters — do not extend. Missing either one makes the whole gain taxable.
Proceeds go directly to a qualified intermediary (QI), never to you. Touch the money, even briefly, and the exchange is dead.
Deliver a written list of replacement properties to the QI. Most investors use the three-property rule (any three, any value); alternatively identify more under the 200% rule (combined value ≤ twice what you sold).
Close on one or more identified properties. Not day 181. Smart exchangers are effectively under contract on the replacement before the sale ever closes.
Almost every failed exchange fails on one of these four.
To defer everything, the replacement must cost at least what you sold for, and all equity must go in. Buy cheaper or pocket cash and the difference — "boot" — is taxed.
The name (or tax entity) on the old deed must take title to the new one. Restructuring ownership mid-exchange is a classic self-inflicted wound.
The QI must be engaged before your sale closes. There is no retroactive fix — a closed sale without a QI in place is just a taxable sale.
Pay off a $1M mortgage and take a $600K one on the replacement, and the $400K difference is treated as boot unless you add cash to cover it.
The standard "delayed" exchange fits most situations, but the structure flexes.
Generally yes — property used in your trade or business qualifies, so selling a rental and buying your own warehouse can work. Structure matters; this is squarely a talk-to-your-CPA scenario.
Under current law, heirs receive the property at a stepped-up basis — the deferred gain is generally never taxed. This is why "swap till you drop" is a real estate cliché.
Yes — that portion is boot and it's taxable. The rest of the exchange still defers. Decide the amount before closing so the QI documents it correctly.
Rarely, and only under strict personal-use and rental-history rules. Assume no until a tax professional says otherwise.
A 1031 lives or dies on execution details. Before you list a property you might exchange, line up a qualified intermediary and involve your CPA — the sequencing decisions happen earlier than most sellers expect.
The exchange calendar starts the day you close a sale. Talk to us before you list — sequencing the sale and the replacement is most of the game.