What is a 1031 Exchange?

What is a 1031 Exchange?

Real estate investors benefit from several tax breaks, and 1031 exchanges are one of the biggest tax advantages available! A 1031 exchange allows you to defer taxes on the sale of an investment property. However, there are several rules and regulations to be aware of before attempting a 1031 exchange.

Here is what you need to know about 1031 exchanges.


A 1031 exchange is when you trade an existing investment property for a like-kind investment property, rather than selling it outright and collecting your proceeds.

The purpose of a 1031 exchange is to defer capital gains taxes from the sale of an investment property. By rolling your proceeds into a new property, you do not realize the gains from the sale, therefore, you don’t get taxed on those gains. This leaves you with more of your proceeds to invest in your next deal. And you can repeat this process as many times as you like, delaying your tax liability indefinitely.

Here’s how a 1031 exchange works: you identify your relinquished property (the property you will be disposing of) and your replacement property (the property you will acquire), and you name a qualified intermediary to handle the funds during the exchange. This ensures that your properties qualify for the exchange and that all proceeds are kept out of your hands during the transaction. Then, you file the appropriate forms with your next tax returns to document the deferment of your capital gains tax on the sale of the relinquished property.


Taking advantage of a 1031 exchange requires playing by the rules. Here are the main rules of a 1031 exchange:

  1. The properties must be like-kind. Like-kind is a vague term, and it can be liberally interpreted. Generally, you can exchange properties that are in the same general asset class. A residential property for a residential property, or an industrial property for an industrial property, for example.

  2. Both properties must be held as investments. Primary residences and vacation homes don’t qualify.

  3. To defer the full amount of your taxes, you can’t receive any cash or any debt reduction. This generally means that your new property must cost more than your last property, and your new property needs to be financed with at least as much debt as you have in your current property.

  4. You must identify your replacement property within 45 days of closing on the sale of your relinquished property. You are allowed to choose up to three properties as potential replacements, but you must purchase one of those properties.

  5. You must close on your replacement property within 180 days of closing on the sale of your relinquished property. Because the closing process typically takes at least 30-60 days, you’ll want to get your replacement property under contract well before the 180-day mark following the sale of your relinquished property.


If you’re a real estate investor who wants to grow your portfolio while deferring capital gains taxes, a 1031 exchange might be a great fit for you. It’s always best to have a certified accountant review your finances and your real estate portfolio to assess your tax liability and advise you on tax matters.

If you’re ready to level up your investment portfolio, contact the real estate experts here at Sequoia Real Estate. Our team can help you find a buyer for any property you’re ready to sell, as well as new properties with exceptional return potential. Put our experience to work for you today!

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