Tax Strategy

1031 Exchange: Defer Capital Gains Indefinitely

The Ultimate Real Estate Tax Advantage

Learn how 1031 like-kind exchanges defer capital gains tax indefinitely. Understand deadlines, DST options, and how stepped-up basis eliminates gains at death.

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45 Days

Identification Deadline

180 Days

Exchange Completion Deadline

Tax at Death with Stepped-Up Basis

23.8%+

Federal Capital Gains Tax Avoided

Quick Answer

1031 exchange defers ALL capital gains when you sell investment property and reinvest in like-kind real estate
Strict deadlines: identify replacement property within 45 days, close within 180 days - no exceptions
At death, heirs receive stepped-up basis, eliminating all deferred gains permanently
Delaware Statutory Trusts (DSTs) allow passive 1031 exchanges into institutional-quality properties
Must use Qualified Intermediary (QI) to hold funds - touching proceeds yourself kills the exchange

The Opportunity

Why 1031 Exchange Matters

Defer All Capital Gains Tax Indefinitely

IRC Section 1031 allows you to sell appreciated real estate and reinvest in like-kind property without paying capital gains tax. The tax is deferred indefinitely - continue exchanging throughout your lifetime. At death, heirs receive stepped-up basis, potentially eliminating all deferred gains permanently.

Preserve and Compound Your Capital

Without 1031 exchange, selling a $1M property with $500K gain costs $120K+ in federal/state taxes (23.8%+ rate). With 1031, you keep and reinvest the full $1M. Over 20 years of compounding at 8%, that $120K grows to $559K. The tax deferral literally creates wealth.

Portfolio Diversification and Repositioning

Exchange allows you to restructure your real estate portfolio without tax friction. Trade a single property for multiple properties (diversification), consolidate multiple properties into one (simplification), or move from active management to passive investments (lifestyle). All tax-deferred.

Geographic and Asset Class Flexibility

Exchange from any U.S. real estate to any other U.S. real estate held for investment or business use. Move from apartment buildings to commercial properties, from one state to another, from direct ownership to Delaware Statutory Trusts (DSTs). "Like-kind" means real estate for real estate - not the same type.

Implementation

Proven Strategies

Standard Delayed Exchange

Sell your property, use a Qualified Intermediary (QI) to hold proceeds, then identify replacement properties within 45 days and close within 180 days. This is the most common 1031 exchange structure. The QI is essential - if you touch the funds, the exchange fails.

Best for: Investors selling property who have identified or expect to identify replacement property within 45 days.

Example:

Sell $2M apartment building (basis $800K, $1.2M gain). QI holds $2M proceeds. Within 45 days, identify replacement property. Within 180 days, close on $2.5M commercial building using $2M from exchange + $500K additional investment. All $1.2M gain deferred.

Delaware Statutory Trust (DST) Exchange

Exchange into fractional ownership of institutional-quality properties through DSTs. DSTs qualify as like-kind property under 1031. Benefits: passive income, professional management, diversification across multiple properties/markets, no landlord responsibilities. Minimum investments typically $100K-$250K.

Best for: Investors wanting to transition from active property management to passive real estate income while deferring capital gains.

Example:

Sell $1M rental property, tired of management. Exchange into 4 different DSTs: $250K each in apartment, medical office, retail, and industrial. Receive monthly distributions, no management responsibility. Full $1M remains invested and working.

Reverse Exchange

When you need to acquire replacement property before selling relinquished property. An Exchange Accommodation Titleholder (EAT) holds title to the new property while you sell the old one. More complex and expensive than standard exchange, but allows you to secure great deals without missing the opportunity.

Best for: Investors who find an ideal replacement property before their current property sells, or in competitive markets where timing is critical.

Example:

Find perfect replacement property for $3M, but current property has not sold. EAT takes title to new property. You continue marketing and sell current property within 180 days. Transfer new property from EAT to yourself. Exchange completed in reverse order.

Avoid These Pitfalls

Common Mistakes

Missing the 45-Day Identification Deadline

You must identify replacement properties in writing within 45 days of selling - no exceptions, no extensions. This deadline is firm even if it falls on a weekend or holiday. Many exchanges fail simply because investors wait too long to identify properties. Start searching before you sell.

Taking Constructive Receipt of Funds

If you receive, control, or have access to exchange proceeds, the exchange fails. Use a Qualified Intermediary who holds funds in a separate account. Do not use your attorney, title company employee, or anyone who has acted as your agent in the prior 2 years as QI.

Boot Creates Taxable Gain

"Boot" is any cash or non-like-kind property received in an exchange. If you exchange down in value, receive cash, or have excess debt relief, you pay tax on the boot received. To defer all gains: reinvest 100% of proceeds and acquire equal or greater debt replacement.

Questions

Common Questions

Here are the most common questions we receive about this topic.

Ask Your Question

For real estate, "like-kind" means any real property held for investment or business use. You can exchange an apartment building for raw land, a rental house for a commercial building, or U.S. property for other U.S. property. The key is the property must be held for investment/business - not personal use or inventory (dealer property).

Two critical deadlines: (1) 45-day identification period - identify replacement properties in writing within 45 days of selling, (2) 180-day exchange period - close on replacement property within 180 days of selling OR by your tax return due date, whichever is earlier. Both deadlines are firm.

Three identification rules: (1) 3-property rule - identify up to 3 properties regardless of value, (2) 200% rule - identify any number as long as total value does not exceed 200% of relinquished property value, (3) 95% rule - identify any number if you acquire 95%+ of identified value. Most investors use the 3-property rule.

No - 1031 exchanges only apply to property held for investment or business use. However, strategies exist: convert primary residence to rental for 1-2+ years, then exchange. Or use Section 121 exclusion ($250K/$500K capital gains exclusion for primary residence) alongside 1031 for property that was both.

This is the ultimate benefit: deferred gains disappear at death. Heirs receive stepped-up basis to fair market value at date of death. All previously deferred gains are eliminated - never taxed. This is why 1031 exchange combined with estate planning creates permanent tax elimination, not just deferral.

Ready to Execute a 1031 Exchange?

1031 exchanges require precise timing and qualified intermediaries. Let us help you structure your exchange correctly and identify optimal replacement properties.

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