This is one of the most powerful wealth-building tools in real estate. And one of the most misunderstood.
Here is what it is: when you sell a real estate investment property, you normally owe capital gains tax on the profit. A 1031 exchange lets you defer that tax by rolling the proceeds directly into a new property.
You do not pay. You reinvest. And you defer the tax until you sell the next property, at which point you can do it again.
Here is what you need to know to do it:
- You have 45 days from the sale to identify your replacement property
- You have 180 days to close on it
- The replacement property must be of equal or greater value
- The proceeds must go through a qualified intermediary so you cannot touch the money
- It must be like-kind property, meaning real estate for real estate.
Done right, a 1031 exchange lets you compound your equity across decades without giving a significant portion to taxes every time you sell.
Done wrong: missing the deadlines, spending the proceeds, skipping the intermediary and the full tax bill comes due immediately.
If you own investment real estate and have not talked to your accountant about 1031s, that is the first conversation to have.
Have you ever used a 1031 exchange? What was your experience?
Wednesday Real Estate 101: The 1031 exchange
