1031 Exchange Basics: How Investors Defer Taxes When They Sell
Daniel ParkNo. 35
Updated
Key takeaways
- A 1031 exchange can defer capital gains taxes when you sell investment property and buy another.
- You must identify replacement property within 45 days and close within 180 days.
- A qualified intermediary must hold the sale proceeds; you can’t touch the money.
- Your main home doesn’t qualify. Work with a tax advisor before you list.
When you sell a rental at a profit, taxes can take a big bite. A 1031 exchange, named after a section of the tax code, lets you defer those taxes by reinvesting in another investment property.
The key rules
| Rule | What it means |
|---|---|
| Like-kind | Investment or business real estate for other investment or business real estate |
| 45 days | Identify replacement properties in writing |
| 180 days | Close on the replacement property |
| Qualified intermediary | A third party holds the proceeds between sales |
| Equal or greater value | Buy at least as much and reinvest all the equity to defer fully |
What is boot?
Any cash you keep, or debt you don’t replace, is called boot. It can be taxable even if the rest of the exchange qualifies.
Common mistakes
- Taking possession of the sale proceeds, even briefly.
- Missing the 45-day identification deadline.
- Trying to exchange a personal residence.
- Not lining up financing for the replacement property early.
Daniel’s tip: Start shopping for the replacement property before you list the one you’re selling. The 45-day clock moves fast.
Considering an exchange? Let’s plan the timing together.
Frequently asked questions
Can I exchange into a property in another state?
Generally, yes, as long as it’s like-kind U.S. real estate held for investment or business use.
Who can be my qualified intermediary?
An independent company that specializes in exchanges. Your agent, attorney or accountant usually can’t serve in that role.
Filed under Investing
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