🔄 About 1031 Exchange

A Strategic Tool for Real Estate Investors

A 1031 Exchange, under Section 1031 of the Internal Revenue Code, allows real estate investors to defer paying capital gains taxes when they sell an investment property—as long as the proceeds are reinvested in another “like-kind” property.

This strategy helps investors preserve equity, scale their portfolio, and increase returns over time.

📂 Types of 1031 Exchanges

Delayed Exchange (most common) – Sell first, buy later within the 180-day timeline.
Simultaneous Exchange – Sell and buy happen on the same day.
Reverse Exchange – Buy replacement property first before selling the original.
Build-to-Suit (Construction Exchange) – Use exchange funds to improve or build on the replacement property (more complex, but allowed).

✅ Key Benefits of a 1031 Exchange

Capital Gains Tax Deferral
Postpone paying federal and state capital gains taxes, depreciation recapture taxes, and even net investment income tax.
Portfolio Growth & Diversification
Trade into multiple smaller properties, or consolidate into a larger asset. Reallocate your holdings across different markets or asset classes.
Leverage & Cash Flow
Reinvest full sale proceeds (instead of after-tax proceeds), allowing more leverage and potentially higher cash flow.
Estate Planning Advantage
If held until death, heirs receive a stepped-up basis, potentially eliminating deferred taxes altogether.

🧭 How a 1031 Exchange Works: Step-by-Step

1. List & Sell the Original Property

The property must be used for investment or business purposes (not primary residence).

4. Close on the New Property

You must complete the purchase of the new property within 180 calendar days of selling the original property.

2. Engage a Qualified Intermediary (QI)

Before closing, hire a QI to handle funds. Sellers cannot touch the proceeds directly.

5. Complete the Exchange

The QI transfers the held funds to acquire the replacement property, completing the tax-deferred exchange.

3. Identify Replacement Properties

You have 45 calendar days from the sale of your property to identify potential replacements. You can:
- Identify up to 3 properties (any value), or
- Identify more than 3 as long as their total value does not exceed 200% of the sold property.

📌 Eligibility & Requirements

Like-Kind Property
Refers to the nature of the investment, not the type—e.g., you can exchange a rental condo for a commercial building or raw land.
Investment or Business Use Only
Primary residences or vacation homes generally do not qualify.
Same Taxpayer Rule
The seller of the original property must be the same entity/person that buys the replacement.
Use of a Qualified Intermediary
A neutral third party must hold and transfer the funds—investors cannot access the proceeds at any point.
Strict Timelines
45-day and 180-day windows are firm and non-extendable, even if the deadlines fall on weekends or holidays.

🧠 Additional Considerations

Partial Exchanges
If you don’t reinvest the full amount, the difference (“boot”) is taxable.
Mortgage Balances
If the new loan is less than the original, the shortfall may be taxed as boot.
State Taxes
Some states don’t recognize 1031 exchanges, so local tax advice is crucial.
Reverse Exchange Option
You can acquire a new property before selling the old one, but it’s more complex and costlier.

⚠️ Common Mistakes to Avoid

This builds trust and positions you as a knowledgeable resource:

Missing the 45-day or 180-day deadlines
Misidentifying properties incorrectly
Taking possession of funds (which disqualifies the exchange)
Not understanding the “boot” tax implications

📩 Let’s Talk 1031 Strategy

If you're considering a 1031 Exchange, we’re here to help.
We’ll connect you with trusted Qualified Intermediaries, help you identify strong replacement opportunities, and guide you through timelines and compliance. Whether you're upgrading, downsizing, or diversifying, Nancy's team has the insight and network to make your exchange a success.