What a 1031 Exchange Does

A 1031 exchange, named for the section of the tax code, allows an investor selling an investment property to defer capital gains tax by reinvesting the proceeds into another qualifying investment property. Rather than paying tax on the gain at sale, the tax is deferred, letting more capital continue working in the next investment.

The Like-Kind Requirement

The replacement property must be ‘like-kind,’ which for real estate is broadly interpreted — most investment or business real estate qualifies as like-kind to other investment real estate. However, the property must be held for investment or business use, not personal use, which is why 1031 exchanges apply to investment properties, not primary residences.

Strict Rules and Deadlines

1031 exchanges follow strict IRS rules and deadlines — notably, tight timeframes to identify and close on the replacement property after the sale. Missing a deadline can disqualify the exchange and trigger the tax. A qualified intermediary must typically hold the proceeds; you can’t simply take the cash and reinvest it yourself.

Get Professional Guidance

Because the rules are complex, the deadlines unforgiving, and the stakes significant, a 1031 exchange should never be attempted without professional help. A qualified intermediary facilitates the exchange, and a tax professional advises on whether and how it fits your situation. This overview is educational only — your specific exchange requires qualified guidance.

Frequently Asked Questions

A 1031 exchange can be a powerful way to defer taxes and keep capital working — but its strict rules and deadlines mean it’s a strategy to pursue only with qualified professional guidance.