Real Estate Law · Haute Lawyer Network
What Is a 1031 Exchange in Real Estate?
Last reviewed: June 2026
A 1031 exchange — named after Section 1031 of the Internal Revenue Code — is a tax deferral strategy that allows real estate investors to sell investment property and defer the capital gains tax on the sale by reinvesting the proceeds into a like-kind replacement property.
Without a 1031 exchange, selling appreciated investment property triggers capital gains tax — potentially 20% federal plus state taxes on the gain. With a proper 1031 exchange, that tax is deferred indefinitely until the replacement property is eventually sold without another exchange.
Key requirements: the properties must be held for investment or business use (not personal use), the replacement property must be of equal or greater value, the investor must identify replacement property within 45 days of closing, and the replacement property must be acquired within 180 days. A qualified intermediary — a third party who holds the sales proceeds during the exchange — is required.
Frequently Asked Questions
Does a 1031 exchange eliminate capital gains taxes permanently?
No — it defers them. Taxes are owed when the replacement property is eventually sold without a subsequent exchange. However, if you hold the replacement property until death, the property receives a stepped-up basis at death, potentially eliminating the deferred tax entirely.
What is a like-kind property?
For real estate, like-kind is broadly interpreted — virtually any real property held for investment qualifies, including raw land, residential rentals, commercial buildings, and industrial properties. The properties do not need to be similar in type.
What is boot in a 1031 exchange?
Cash or non-like-kind property received in an exchange. Boot is taxable in the year of the exchange. To fully defer taxes, the replacement property must be of equal or greater value and all cash must be reinvested.
Can I use a 1031 exchange for my primary residence?
No. 1031 exchanges are only available for investment or business properties. Primary residences use a different exclusion under Section 121.
What happens if I miss the 45-day identification or 180-day exchange deadline?
Missing either deadline disqualifies the exchange — the entire gain from the sale becomes taxable in the year of sale. Deadlines are strict with very limited exceptions.
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