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What Is a 1031 Exchange?
By Priya Raman
The rule that lets your gain outrun the calendar, for a while.
The rule that lets your gain outrun the calendar, for a while.
Sell an investment property for more than you paid, and the IRS wants a share of that gain the same year, counting federal capital gains tax, the net investment income tax, and any depreciation recapture. Section 1031 offers a legal way to put that bill off, by rolling the proceeds into another property instead of your pocket.
Both the property you sell (relinquished property) and the property you buy (replacement property) must be held for investment or productive use in a trade or business. Your primary residence does not qualify.
Any real property held for investment qualifies as like-kind to any other real property held for investment. A single-family rental can exchange into an apartment building, a commercial office, or raw land, as long as the intent is investment.
You cannot touch the sale proceeds. A qualified intermediary must receive the funds from your buyer, hold them during the identification and purchase window, and then pay them directly to the seller of your replacement property. If you receive the cash, the exchange fails.
Treat this page as background, not a ruling on your own transaction. A qualified intermediary and a tax professional should sign off before you act on any of it.
Anyone selling real property held for investment or for productive use in a trade or business, and reinvesting in like-kind replacement property. Individuals, LLCs, partnerships, and trusts can all use Section 1031, provided the same taxpayer that sells is the one that buys.
Your primary residence, a second home used mainly for personal enjoyment, and, since the 2017 tax law changes, any personal property such as equipment or vehicles. Only real property held for investment or business use qualifies.
No. It defers the tax by carrying your original, lower basis into the replacement property. The deferred amount becomes due if you eventually sell without exchanging into another replacement. Investors who keep exchanging can keep deferring the same gain for as long as they keep trading up.
There is no limit written into the statute. You can chain exchange after exchange, deferring the same original gain each time, as long as each transaction independently satisfies the property, timing, and reinvestment rules.