What Is a 1031 Exchange?
A 1031 exchange lets an investor sell one piece of investment real estate and buy another without paying the capital-gains tax at sale. Named for Section 1031 of the tax code, it treats the two properties as a continuation of the same investment rather than a sale and a purchase. Defer the gain, keep the full amount of equity working, and repeat.
The rules are narrow and the clock is fixed. You never touch the sale proceeds; a qualified intermediary holds them. You have 45 days to name your replacement and 180 to close. Miss either deadline and the exchange fails, which is why most investors line up replacement property, often a DST or a royalty fund, before they sell.
How It Works
- Sell investment real estate. Proceeds go to a qualified intermediary, not to you.
- Identify within 45 days. Name your replacement property in writing, up to three under the standard rule.
- Close within 180 days. Acquire the replacement and complete the exchange.
- Match value and debt. Buy equal or greater in price and replace any debt to defer the full gain.
- Defer, then repeat. Exchange again down the road, or hold for a step-up at death.
The 1031 Clock
- Day 0
Relinquished property closes
Sale proceeds go to your qualified intermediary, not to you. The clock starts the day the sale closes.
- By Day 45
Identification deadline
Identify replacement property in writing under the 3-property, 200%, or 95% rule. Many investors name a DST as a backup.
- By Day 180
Closing deadline
Acquire the replacement and match value and debt to defer 100% of the gain. The two windows run at the same time.
Sell, reinvest, defer, repeat. Kept rolling and capped by a step-up at death, the tax can disappear for good.
Why investors use a 1031Tax Advantages
Roll 100% of the gain into replacement property and defer capital gains, depreciation recapture, and the 3.8% net investment income tax.
Deferring the tax keeps the whole sale amount invested, so more capital works for you in the next property.
Heirs inherit at a stepped-up basis, which can eliminate a lifetime of deferred gain.
Who It's For
A good fit
- Owners of appreciated investment or business real estate.
- Investors who want to keep equity working, not pay tax at sale.
- Those who can identify replacement property inside 45 days.
- Estate plans built around a step-up at death.
Not a fit
- Sellers of a primary residence, where a different exclusion applies.
- Investors who want to cash out and spend the proceeds.
- Anyone who cannot meet the 45- and 180-day deadlines.
- Dealers holding property primarily for resale.
Considerations & Risks
The deadlines do not bend, and a failed identification turns the deal into a taxable sale. Any cash you pull out, called boot, is taxed. You must replace both value and debt to defer the full gain. Rushing to buy inside 45 days pushes some investors into weak replacements, which is exactly why pre-packaged options like DSTs exist. The deferred gain is not forgiven; it follows the property until a sale or a step-up.
The Identification Rules
| Rule | What it allows | Best for |
|---|---|---|
| 3-property rule | Identify up to three properties of any value; close on one or more. | Most exchangers; allows a DST backup |
| 200% rule | Identify any number, so long as total value is 200% or less of the sale price. | Diversifying across several DSTs |
| 95% rule | Identify any number, but you must close on 95% of the total identified value. | Rare; large multi-asset programs |
Comply with any one rule to keep the exchange valid. Confirm specifics with your CPA and qualified intermediary.
Frequently Asked Questions
What property qualifies?
What are the 45- and 180-day rules?
What is boot?
Can I keep deferring forever?
Glossary
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