Learn how IRC Section 1031 allows real estate investors to legally defer 100% of capital gains taxes when selling investment property. No sales pitch—just clear, accurate information.
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes when selling an investment property by reinvesting the proceeds into a "like-kind" replacement property.
This powerful tax strategy has been part of the tax code since 1921, allowing investors to preserve and grow their wealth by deferring taxes indefinitely—or even eliminating them entirely through a stepped-up basis at death.
45 days to identify, 180 days to close
You cannot touch the funds directly
Real estate for real estate—broad definition
Close on the sale of your relinquished property. Proceeds go directly to the Qualified Intermediary.
Identify up to 3 potential replacement properties (or more under special rules) in writing.
Close on your replacement property. The QI transfers funds directly to complete the exchange.
On a $500,000 capital gain, the tax savings are substantial. Here's a side-by-side comparison:
To qualify for tax deferral, your exchange must meet these IRS requirements. Missing any of these can disqualify your exchange.
Both properties must be real estate held for investment or business use. The definition is broad—an apartment can be exchanged for a retail center.
FlexibleProperty must be held for productive use in trade/business or investment. Personal residences and property held primarily for sale do not qualify.
CriticalYou must identify potential replacement properties in writing within 45 calendar days of selling. This deadline cannot be extended.
Strict DeadlineThe replacement property must be acquired within 180 days of sale OR by your tax return due date (including extensions), whichever is earlier.
Strict DeadlineYou cannot touch the sale proceeds. A Qualified Intermediary must hold the funds and facilitate the exchange to maintain tax-deferred status.
MandatoryTo defer all taxes, the replacement property must be of equal or greater value, and all proceeds must be reinvested. Any "boot" is taxable.
For Full DeferralThe taxpayer who sells the relinquished property must be the same taxpayer who acquires the replacement property. Title must match.
TechnicalBoth the relinquished and replacement properties must be located within the United States. Foreign property does not qualify under Section 1031.
Domestic"Like-kind" doesn't mean identical. Any real property held for investment can generally be exchanged for any other real property held for investment.
Single-family homes, duplexes, triplexes, and multi-family apartment buildings held as rental investments.
Office buildings, retail centers, shopping malls, restaurants, and mixed-use commercial developments.
Manufacturing facilities, distribution centers, warehouses, flex space, and self-storage facilities.
Vacant land, undeveloped acreage, and land held for future development or investment appreciation.
Single-tenant net lease properties like pharmacies, banks, fast food restaurants, and dollar stores.
Delaware Statutory Trust fractional ownership interests in institutional-quality real estate portfolios.
Important: Personal residences, property held primarily for sale (dealer/flipper property), and partnership interests do NOT qualify for 1031 exchange treatment. Always consult with a tax professional.
Different situations call for different exchange structures. Here are the main types:
The standard 1031 exchange. Sell first, then buy replacement property within the required timeframes.
Acquire the replacement property before selling your current property. Useful in competitive markets.
Use exchange funds to improve or construct on the replacement property. Also called a build-to-suit exchange.
The relinquished and replacement property closings occur on the same day. Rare in practice but simplest in concept.
Get answers to the most common questions about 1031 exchanges.
No. Section 1031 only applies to property held for investment or productive use in trade or business. Personal residences do not qualify. However, if you convert your home to a rental property and hold it as an investment for a sufficient period, it may then qualify.
If you fail to properly identify replacement property within 45 days, the exchange fails. The proceeds will be returned to you, and you'll owe capital gains taxes on the sale. These deadlines cannot be extended except in very limited circumstances.
Boot refers to any non-like-kind property or cash received in an exchange. This includes cash taken out, debt reduction (mortgage boot), and personal property received. Boot is taxable in the year of the exchange.
Yes. You can identify up to 3 properties of any value (Three Property Rule), or more than 3 if their combined value doesn't exceed 200% of the relinquished property value (200% Rule).
A QI must be an independent third party who is not disqualified. Disqualified persons include your attorney, CPA, real estate agent, employee, or anyone who has acted as your agent within the prior two years.
Yes, you can exchange property in one state for property in another state. However, both properties must be located within the United States. Foreign property does not qualify under Section 1031.
There's no specific required holding period in Section 1031 itself. However, you must have intent to hold for investment at the time of the exchange. The IRS generally looks for at least one to two years.
A 1031 exchange defers taxes—it doesn't eliminate them. However, you can continue doing exchanges indefinitely. If you hold the final property until death, your heirs receive a stepped-up basis, potentially eliminating the deferred gain.
Dive deeper into 1031 exchanges with our comprehensive guides, calculators, and educational materials.
Everything you need to know about 1031 exchanges in one comprehensive, downloadable guide.
Download Free GuideCalculate your potential tax liability and see exactly how much you could save with a 1031 exchange.
Use CalculatorNever miss a deadline with our comprehensive timeline checklist for every stage of your exchange.
Get ChecklistOur educational resources are designed to help you understand the complexities of 1031 exchanges. Explore our guides, use our calculators, and get the knowledge you need.