1031 Tax Deferred Exchanges
A 1031 exchange lets you sell investment real estate and reinvest the proceeds into a like-kind replacement property — deferring federal capital gains tax, depreciation recapture, and (in most states) state income tax.
The four-step exchange
Sell the relinquished property
Sale proceeds go directly to a Qualified Intermediary (QI). You can never take constructive receipt of the funds or the exchange is invalidated.
Identify within 45 days
From the close of sale, you have 45 calendar days to identify potential replacement properties in writing to your QI.
Close within 180 days
You must close on one or more of the identified properties within 180 days of the original sale (or your tax filing deadline, whichever comes first).
Take title in the same name
The same taxpayer who sold the relinquished property must take title to the replacement property — and the value/debt must be equal or greater.
Identification rules
Within the 45-day window, you must identify replacement properties using one of three IRS-recognized rules:
Three-Property Rule
Identify up to three properties of any value. Most common choice for typical exchangers.
200% Rule
Identify any number of properties as long as their combined value does not exceed 200% of the relinquished property.
95% Rule
Identify any number of properties of any value — but you must actually close on 95% of the identified value.
Why investors exchange
Defer the tax
Federal capital gains, depreciation recapture, and most state taxes are deferred — keeping 100% of your equity working.
Consolidate or diversify
Trade several small properties for one larger asset — or split one large property across several DSTs in different markets.
Step out of active management
Exchange a hands-on rental into a passive DST or TIC and reclaim your time without triggering a taxable event.
Estate planning
Heirs receive a stepped-up basis at death, potentially eliminating the deferred gain entirely.
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