A 1031 exchange, named after Section 1031 of the tax code, allows investors to defer capital gains taxes when selling investment property by reinvesting the proceeds into like-kind property.

Key Benefits

• Defer capital gains tax and depreciation recapture
• Leverage entire sale proceeds for reinvestment
• Build wealth through tax deferral
• Diversify or consolidate real estate holdings
• Reset depreciation on replacement property

Critical Rules

• Like-Kind: Real property for real property (broad definition)
• Investment/Business: Both properties must be held for investment or business
• 45-Day Rule: Identify replacement property within 45 days
• 180-Day Rule: Close on replacement within 180 days
• Qualified Intermediary: Cannot touch exchange funds directly
• Boot: Cash or debt relief received is taxable

Identification Rules

• 3-Property Rule: Identify up to 3 properties regardless of value
• 200% Rule: Identify unlimited properties if total value ≤ 200% of relinquished property
• 95% Rule: Must acquire 95% of identified value if exceeding above rules

Common Pitfalls

• Missing deadlines (strict, no extensions)
• Taking possession of funds
• Not using qualified intermediary
• Mixing personal use with investment property
• Inadequate replacement property value or debt