1031 EXCHANGE

A 1031 exchange (named after Section 1031 of the IRS tax code) isa legal way to defer paying capital gains taxes when you sell an investment property—by reinvesting the proceeds into another similar property.

In simple terms:

You sell one investment property → buy another → and postpone taxes.

Key points

1. It only applies to investment or business property

• Not your primary residence
• Examples: rental properties, commercial buildings, land

2. “Like-kind” is very broad

• You can exchange:
• Condo → multifamily
• Land → retail center
• As long as both are investment properties, they qualify

3. You must follow strict timelines

• 45 days → identify the new property
• 180 days → close on the new purchase

4. You cannot touch the money

• Funds must go through a Qualified Intermediary (QI)
• If you receive the money → you pay taxes

5. You must reinvest all (or more) value

• To defer 100% of taxes:
• Buy property of equal or greater value
• Reinvest all proceeds
• Otherwise, the leftover is taxed (called “boot”)

Why investors use it

• Defer capital gains tax (can be 20%+)
• Grow portfolio faster
• Upgrade to better or higher-income properties
• Consolidate or diversify assets

Example

• You sell a rental for $500,000 (with a gain)
• Instead of paying taxes, you:
• Reinvest into a $600,000 property
• Use a 1031 exchange
  👉 Result: No taxes paid now

Important note

This is a tax deferral, not tax elimination

• Taxes are due when you eventually sell (unless you keep exchanging or pass it to heirs)