1031 Exchange

A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, is a tax-deferral strategy that allows real estate investors to sell a property and reinvest the proceeds into a "like-kind" property while deferring capital gains taxes. This is commonly used to grow and restructure real estate investments without an immediate tax burden.

 

Key Rules of a 1031 Exchange:

1. Like-Kind Property – The replacement property must be of the same nature, character or class as the sold property (e.g., investment real estate for investment real estate).

2. Strict Timelines – The investor must identify a new property within 45 days of selling the old one and complete the purchase within 180 days.

3. Use of a Qualified Intermediary (QI) – The proceeds from the sale must be held by a third party (QI) and cannot go directly to the seller.

4. Equal or Greater Value – To defer all capital gains taxes, the replacement property must be of equal or greater value, and all proceeds must be reinvested.

 

A 1031 exchange is an excellent tool for investors looking to defer taxes while upgrading, diversifying or consolidating their real estate holdings.