A 1031 exchange is one of the most powerful wealth-preservation tools in real estate. Named after Section 1031 of the Internal Revenue Code, it allows investors to sell an investment property and defer all capital gains taxes — as long as the proceeds are reinvested into a "like-kind" replacement property within specific timeframes. Done right, investors can trade up in value indefinitely, deferring taxes for decades or until death (when heirs receive a stepped-up basis, potentially eliminating the tax entirely).
The Basic Rules of a 1031 Exchange
- Investment property only: The sold property (relinquished property) must have been held for investment or business use — not as a primary residence or short-term flip
- Like-kind replacement: "Like-kind" is broadly interpreted — any U.S. real estate held for investment qualifies. You can exchange a single-family rental for a multifamily apartment, raw land, or commercial property
- Equal or greater value: The replacement property must cost at least as much as the net sales price of the relinquished property
- All proceeds reinvested: No cash out — all net equity must be reinvested through the Qualified Intermediary
- Must use a Qualified Intermediary (QI): You cannot touch the sale proceeds directly. A licensed QI holds funds between transactions
The Critical 1031 Timelines
This is where 1031 exchanges fail. The IRS is not flexible on timing:
- Day 0: Close on the sale of your relinquished property. The clock starts immediately.
- Day 45: Deadline to identify replacement property in writing to your QI. You can identify up to 3 properties (3-property rule) or more under the 200% rule or 95% rule.
- Day 180: Deadline to close on the replacement property. This is an absolute deadline.
If you miss either deadline, the exchange fails, and you owe taxes on the full gain immediately. Start identifying properties before you close on the sale — not after.
The Stepped-Up Basis Strategy: When an investor holds a 1031-exchanged property until death, heirs receive the property at its current fair market value — the inherited basis "steps up" to current value. All deferred capital gains tax is eliminated. This is the ultimate long-term 1031 strategy: defer, defer, die. Consult an estate planning attorney to structure this properly.
Analyze Your Replacement Property Before the 45-Day Deadline
The 45-day identification window is tight. Use the Property Analyzer to quickly evaluate candidates and confirm the numbers work.
Open Property Analyzer →Types of 1031 Exchanges
- Delayed exchange (most common): Sell first, identify within 45 days, close within 180 days
- Simultaneous exchange: Sell and buy on the same day — rare and logistically challenging
- Reverse exchange: Buy the replacement property first, then sell the relinquished property within 180 days. Requires an Exchange Accommodation Titleholder (EAT) and is more expensive — but useful when you find your ideal replacement before selling.
- Improvement/construction exchange: Use exchange proceeds to build or improve a replacement property. Complex rules apply.
What a Qualified Intermediary Does — and How to Choose One
Your QI holds the exchange funds after you sell and disburses them at closing of the replacement property. They also prepare required exchange documentation. Choosing the right QI matters — if your QI goes bankrupt while holding your funds (it's happened), you could lose everything. Use a QI that: holds funds in segregated, FDIC-insured accounts in your name, is bonded and insured, has been in business for 10+ years, and comes with referrals from your real estate attorney or CPA. Fees typically run $750-$1,500 per exchange. See also how depreciation recapture interacts with 1031 exchanges.