Frequently Asked Questions

A Tax Deferred Exchange, or 1031 exchange, lets investors defer capital gains taxes when they sell an investment property and use the proceeds to buy a similar property. This is possible because of Section 1031 of the Internal Revenue Code.

A tax-deferred exchange is also called a 1031 exchange or a like-kind exchange.

The main parts of a tax-deferred exchange are:

• The exchange must involve investment or business properties. Personal residences do not qualify.
• The investor must meet specific deadlines, such as 45 days to identify new properties and 180 days to complete the exchange.
• A Qualified Intermediary (QI) must hold the sale proceeds so the investor does not receive the money directly. This step keeps the tax-deferral benefit in place.

A 1031 exchange can be a good option for real estate investors who want to improve their properties or diversify their investments without paying taxes right away.

Not all 1031 exchanges mean trading properties directly with someone else. Most of the time, you sell your property, and a Qualified Intermediary (QI) holds the money until you buy a replacement property from another seller.

This setup is called a delayed exchange, which is the most common type of 1031 exchange. In a delayed exchange, you do not need to trade properties directly. The transactions can be separate, as long as you follow the IRS deadlines for identifying and closing on the new property.

No. Although some 1031 exchanges involve closing the sale and purchase at the same time, this is not required.

You can sell your old property and buy the replacement property at different times, as long as you follow the IRS 1031 exchange deadlines.

After you sell your old property, you have up to 45 days to identify replacement properties, and 180 days from the sale date to close on the new property. These deadlines give you some flexibility, but you must locate and buy the replacement property within these time frames for the exchange to qualify.

There is no IRS rule or IRC provision that limits the number of properties you can include in a 1031 exchange.

Investors can exchange several properties for a single replacement property or sell one property and acquire several. Both are perfectly acceptable strategies.

The tax code also allows different types of property exchanges, like simultaneous exchanges, reverse exchanges, and improvement exchanges. This gives investors the flexibility to choose the deal that works best for them.

To entirely defer capital gains taxes from the sale of a relinquished property, consider the following key requirements (this list is not exhaustive):

• The replacement property’s purchase price must be equal to or greater than the net sales price of the relinquished property.
• To achieve full tax deferral, all equity from the sale of the relinquished property must be used to acquire the replacement property.
• Section 1031 applies only to investment or commercial properties; primary residences and vacation homes do not qualify.
• You may not have constructive receipt of the exchange proceeds. A Qualified Intermediary (or exchange facilitator) must hold the funds until they are used to acquire the replacement property.

Failure to follow these rules will result in a taxable event for the exchanger.

For example, if the replacement property’s purchase price is less than that of the relinquished property, the difference is taxable. Any net proceeds not reinvested are considered “boot” and are subject to capital gains taxes.

However, partial 1031 exchanges still qualify for partial tax deferral.