What Is a 1031 Exchange?

Tax-Deferred Real Estate Swaps

A properly executed 1031 Exchange allows investors to defer taxes on the profits from selling a US investment property when the proceeds are reinvested in a “like-kind” US investment property within set time limits. The tax deferral frees up additional capital for investment in the replacement property. Specifically, executing a 1031 Exchange allows deferral of:

  • Federal capital gains tax
  • State capital gains tax
  • Net investment income tax
  • Depreciation recapture

Internal Revenue Code (IRC) Section 1031 (a)(1)

“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”

What Is a 1031 Exchange?

How It Works: Requirements & Timing

Successful 1031 Exchanges require thoughtful, strategic, timely execution that reduces risk while opening the door to greater earning potential. Let Required Properties guide you through every step of the process.

1. Decide to Exchange

You decide to sell your current investment property and want to avoid paying taxes on capital gains.

2. Sell Current Property

You sell your relinquished property. Then, you transfer your funds to your Qualified Intermediary (i.e., an unrelated third party).

3. Identify Replacement Property(ies)

You identify your potential replacement property(ies) within 45 days of selling your relinquished property.

4. Buy Replacement

You must close on one of your identified replacement properties within 180 days of selling your relinquished property.

The Replacement Property

  • Like-kind property must be exchanged for like-kind property (i.e., property of the same nature, character, or class, regardless of quality or grade).
  • Replacement property must be of equal or greater value than the replacement property.
  • The exchanger must place equal or greater debt on the replacement than the outstanding debt on the original property.

The Identification Process

Exchangers may choose to:

  • Identify up to three properties of any value;
  • Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property; or
  • Identify more than three properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.

Curious to see 1031 Exchanges at work in real-life scenarios?

Our case studies showcase specific client exchanges and actual returns from 1031 Exchanges guided by Required Properties.

1031 Exchange Cast Study by Required Properties
Case Study #1 (PDF)
1031 Exchange Cast Study by Required Properties
Case Study #2 (PDF)

Interested in diversifying your portfolio, moving between asset classes, or exploring 1031 Exchanges?

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