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1031 Exchange Basics

What is a 1031 Exchange?

A 1031 exchange — named for Section 1031 of the Internal Revenue Code — allows an investor to sell investment real estate and defer federal (and often state) capital gains tax by reinvesting the proceeds into like-kind replacement property.

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Why is this important?

A 1031 exchange is one of the most powerful wealth-building tools available to real estate investors, allowing you to keep more of your money working rather than sending a large portion to the IRS every time you sell. Over a lifetime of transactions, the difference between paying tax on each sale and deferring it through exchanges can amount to hundreds of thousands — or millions — of dollars in additional compounding capital. For serious investors, it is not a technicality or a loophole — it is a core part of a long-term real estate investment strategy.

Only specific property types qualify for a 1031 exchange...

Both the relinquished property (what you sell) and the replacement property (what you buy) must be real property held for investment or use in a trade or business. Any real property generally qualifies as "like-kind" to any other real property — you can exchange a rental house for commercial land, timberland for an apartment complex, or a warehouse for a strip of retail units. The only real constraints are that the property must be held for investment (not personal use) and must be real property (not equipment, aircraft, or other personal property, which have been excluded since 2018)

What DOES NOT qualify?

  • Primary residences

  • Second homes or vacation properties used primarily for personal enjoyment (see the safe harbor rules under Rev. Proc. 2008-16 if your property is occasionally rented)

  • Inventory or property held primarily for sale (dealer property)

  • Partnership interests (the partnership itself can exchange; individual partners generally cannot exchange their share)

  • Personal property of any kind

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Why do you need a Qualified Intermediary?

A qualified intermediary is not optional — it is a legal requirement for a valid 1031 exchange. The tax code requires that sale proceeds never pass through your hands between the sale of your relinquished property and the acquisition of your replacement property, and the only way to satisfy that requirement is to have an independent QI hold the funds on your behalf.

 

Without one, you are in constructive receipt of the proceeds the moment they are available to you, and the exchange is disqualified — meaning the full gain becomes immediately taxable regardless of your intent to reinvest.

 

The QI also:

  1. executes your exchange agreement,

  2. accepts assignment of your rights under your sale and purchase contracts, and

  3. coordinates with your closing agents throughout the process.​

Handshake Over Contract

Important Deadlines

Every deferred exchange is governed by two hard deadlines that run from the date you close on your relinquished property:

45 Days

Identification Deadline

You must identify your potential replacement properties in a signed written letter delivered to your QI within 45 calendar days of your sale. No exceptions, no extensions (absent a federally declared disaster).

180 Days

Exchange Period

You must close on your replacement property within 180 days of your sale — or by the due date of your income tax return for the year of the sale, whichever comes first. 

Identification

Rules:

You may identify up to three properties under the "3-property rule" regardless of value. If you identify more than three, the total fair market value of all identified properties cannot exceed twice the value of your relinquished property (the "200% rule"). 

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