The 1031 Exchange Explained

By

Michael Roussis

Michael Roussis

To qualify for a 1031 exchange, you must follow strict guidelines:

Like-Kind Property

• Both the old and new properties must be held for investment or business purposes.
• The term “like-kind” is broadly defined. For example, you can exchange a vacant lot for a rental condo, or an office building for a warehouse.

Two Critical Deadlines

• 45-Day Rule: You must identify your replacement property within 45 days of selling the original one.
• 180-Day Rule: You must close on the new property within 180 days of the sale.

Qualified Intermediary (QI)

• You cannot receive the cash proceeds from the sale. Instead, a third-party Qualified Intermediary holds the funds and uses them to purchase the new property on your behalf.

Equal or Greater Value

• To fully defer taxes, the replacement property must be of equal or greater value, and you must reinvest all proceeds from the sale.

Common Uses of a 1031 Exchange

In addition to deferring capital gains taxes so that your investment may grow tax deferred, common uses of a 1031 exchange include:

• Upgrading to higher income properties;
• Diversifying into different markets or asset types; and
• Estate planning in that heirs receive a “step-up” in basis.

What Types of Properties Don’t Qualify

Certain types of property do not qualify for a 1031 exchange:

• Your primary residence;
• Fix-and-flip properties (not held for investment); and
• Stocks, bonds, and personal property

Final Thoughts

A 1031 exchange is a powerful tax deferral strategy for real estate investors. But it is also complex and requires precise timing and compliance with IRS rules. If you are considering a 1031 exchange, it is essential to work with a knowledgeable tax advisor and a qualified intermediary to ensure everything is handled correctly. If done right, a 1031 exchange can help you build long-term wealth, keep your investments growing, and maximize your return on real estate.