1031 tax-deferred exchange.
Section 1031 of the Internal Revenue Code allows investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds in "like-kind" real estate.
How it works
Instead of paying capital gains tax on the sale, you roll your proceeds into a replacement property. The tax isn't eliminated. It's deferred, which lets more of your equity keep working for you.
Key timelines
45 days to identify
From the day you close on the property you sell, you have 45 calendar days to identify potential replacement properties in writing.
180 days to close
You must close on the replacement property within 180 calendar days of the sale (or by your tax filing due date, if earlier).
Common requirements
- Investment or business property: your primary residence doesn't qualify.
- Like-kind: for real estate this is broad. A rental house can be exchanged for an apartment building, land, or commercial property held for investment.
- Qualified intermediary: the sale proceeds must be held by a neutral third party. If you take receipt of the funds, the exchange can be disqualified.
- Equal or greater value: to defer all of the tax, you generally need to buy equal or greater value and reinvest all net proceeds. Cash or debt relief you receive ("boot") may be taxable.
Identification rules
- Three-property rule: identify up to three properties regardless of value.
- 200% rule: identify any number of properties as long as their total value doesn't exceed 200% of the property sold.
Because the timelines are strict, start planning before you list. I'll help you line up replacement options early and coordinate with your qualified intermediary and tax professional.
This page is general information, not tax or legal advice. Please consult a CPA, tax attorney, and qualified intermediary about your specific situation.