1031 Exchange

Increased Buying Power

By deferring capital gains taxes, more of your sale proceeds remain available for reinvestment. This can increase your purchasing power and provide opportunities to acquire higher-value properties with greater income and appreciation potential.

Portfolio Diversification

A 1031 exchange provides flexibility to reposition and diversify your real estate portfolio. You can exchange properties across different markets or property types to better align your investments with your goals and risk tolerance.

Wealth Building

By deferring taxes and keeping more capital invested, you can continue to grow your real estate holdings and build wealth over time. A 1031 exchange can also provide opportunities to move into properties with stronger cash flow, lower operating costs, or greater long-term potential.

Long-term Estate Planning

For investors who hold property for the long term, 1031 exchanges can play a role in estate planning. Under current tax law, inherited property may receive a step-up in basis, which can reduce or eliminate the deferred capital gain for heirs. Investors should consult their tax and estate planning advisors to understand how these rules may apply to their circumstances.

Delayed Exchange

The most common type of 1031 exchange. You sell your existing property first and then acquire a replacement property within the required 180-day period. Replacement property must be identified within 45 days of the sale.

Simultaneous Exchange

The sale of the existing property and purchase of the replacement property occur at the same time. While less common and more complex to coordinate, a simultaneous exchange can be used when the transactions can be completed concurrently.

Reverse Exchange

A reverse exchange allows you to acquire the replacement property before selling your existing property. This can be useful when the desired replacement property becomes available before you have sold your current property.

Improvement Exchange

Also known as a construction or build-to-suit exchange, an improvement exchange allows you to use exchange proceeds to make improvements to the replacement property. Specific requirements apply, including completing qualifying improvements within the exchange period.

1. Timing Requirements

• 45 Days: Identify potential replacement properties within 45 days of selling the original property.
• 180 Days: Complete the purchase of the replacement property within 180 days of the sale, or by the due date of your tax return for that year, including extensions, if earlier.

2. Qualifying Property

Both the property being sold and the replacement property must be held for investment or for productive use in a trade or business. Personal-use property generally does not qualify.

3. Qualified Intermediary

A qualified intermediary must facilitate the exchange and hold the sale proceeds between the sale of the original property and the purchase of the replacement property. The seller generally cannot receive or control the proceeds directly.

4. Ownership Structure

The same taxpayer that sells the original property generally must acquire the replacement property. Maintaining consistent ownership is essential to a valid exchange.

5. Reinvestment

To fully defer the gain, investors generally must reinvest all exchange proceeds and acquire replacement property of equal or greater value. Any cash or other value received that does not qualify for deferral—commonly referred to as “boot”—may be taxable.

6. Documentation

Proper documentation is essential. The exchange must be reported on IRS Form 8824 with the tax return for the year of the exchange.

Missing Deadlines

Timing is critical in a 1031 exchange. Replacement properties must be identified within 45 days, and the exchange must generally be completed within 180 days. Missing either deadline can result in the loss of tax-deferred treatment.

Choosing Non-Qualifying Property

Both the property sold and the replacement property must generally be held for investment or business use. Personal residences and other non-qualifying assets, such as stocks and bonds, are not eligible for a 1031 exchange.

Taking Control of Sale Proceeds

Sale proceeds must be handled through a qualified intermediary. Receiving or controlling the proceeds yourself can jeopardize the tax-deferred status of the exchange.

Failing to Reinvest Properly

To maximize tax deferral, investors generally need to reinvest all exchange proceeds and acquire replacement property of equal or greater value. Cash or other value received may be taxable as “boot.”

Choosing the Wrong Intermediary

The qualified intermediary plays a critical role in structuring and facilitating the exchange. Work with an experienced, reputable intermediary to help ensure the exchange is handled properly and deadlines and documentation requirements are met.