1031 Exchange FAQs

Understanding 1031 exchanges can be complex, so we’ve compiled answers to the most frequently asked questions. Click on the linked questions for more details.

A 1031 exchange allows real estate investors to defer capital gains taxes by reinvesting proceeds from a sold investment property into a like-kind property. This tax-deferral strategy, governed by IRS Section 1031, helps investors preserve capital and continue growing their real estate portfolio without immediate tax liabilities. However, strict IRS rules and timelines must be followed to qualify.

Learn More

The IRS requires that the proceeds from the sale of the relinquished property be held by a Qualified Intermediary (QI). The QI is a neutral third party responsible for holding the funds in a secure escrow account and ensuring that the transaction complies with IRS regulations. The taxpayer cannot receive or control the funds during the exchange, or it will be disqualified.

Read More

The IRS enforces strict deadlines for 1031 exchanges. Once the relinquished property is sold, the investor has 45 days to identify potential replacement properties in writing. The 180-day purchase period then requires the investor to acquire the replacement property within 180 days of the sale or by their tax filing deadline, whichever comes first. These timelines are non-negotiable, and missing them will result in a taxable event.

View Timeline

If you sell an investment property without using a 1031 exchange, you may be subject to capital gains tax, depreciation recapture tax, net investment income tax, and state taxes. The exact amount owed depends on factors such as how long you’ve owned the property, your income level, and state tax laws. Capital gains can be taxed at 0%, 15%, or 20%, while depreciation recapture is taxed at a flat 25%. Additionally, some states impose their own capital gains taxes, which can significantly increase your tax burden.

See Tax Breakdown

Yes, but any funds not reinvested into a replacement property are considered boot, which is subject to capital gains tax. Boot can take two forms:

  • Cash Boot – If you receive cash from the exchange and do not reinvest it, that amount is taxable.
  • Mortgage Boot – If the new mortgage on the replacement property is lower than the mortgage on the relinquished property, the difference is considered taxable income.

To fully defer taxes, you must reinvest all proceeds and ensure the replacement property’s value is equal to or greater than the relinquished property.

Learn About Boot

A Qualified Intermediary (QI) is a required third-party facilitator who holds exchange proceeds, prepares necessary documents, and ensures IRS compliance. A QI is essential because the IRS prohibits the taxpayer from taking direct possession of the sale proceeds. Without a QI, the exchange will be disqualified, and capital gains taxes will be due.

Understand QI’s Role

For a 1031 exchange to be valid, both the relinquished and replacement properties must be like-kind, meaning they must be real estate used for investment or business purposes. The properties do not have to be identical but must be held for investment, rental income, or business use. Personal residences, vacation homes primarily used for personal enjoyment, and fix-and-flip properties do not qualify. The replacement property must also be of equal or greater value to fully defer capital gains taxes.

View Property Rules

Yes, a 1031 exchange allows you to exchange one property for multiple properties, provided that the total value of the new properties meets or exceeds the value of the relinquished property. However, you must follow IRS identification rules, such as the Three-Property Rule, the 200% Rule, or the 95% Rule, to remain compliant.

It depends. A vacation home can only qualify for a 1031 exchange if it has been primarily used as an investment property. If the home has been rented out consistently for at least 14 days per year and personal use has been limited, it may be eligible. The IRS may require proof that the property was used for investment rather than personal enjoyment.

Failure to meet the 45-day identification deadline or 180-day purchase deadline will result in the disqualification of the exchange, making all capital gains taxable. The IRS does not allow deadline extensions, even for weekends, holidays, or unexpected delays.

If the replacement property is lower in value than the relinquished property, the difference is considered boot, which is subject to capital gains tax. To avoid tax liability, it’s best to reinvest all proceeds into a replacement property of equal or greater value.

A delayed exchange is the most common type, where the replacement property is purchased after the sale of the relinquished property. A reverse exchange is when the replacement property is purchased first, before selling the relinquished property. Reverse exchanges are more complex and require additional planning and financing.

Yes, vacant land qualifies for a 1031 exchange if it is held for investment or business use. However, land that is flipped or held for resale does not qualify.

No, the IRS requires that both the relinquished and replacement properties be located within the United States. Foreign real estate does not qualify for a 1031 exchange.

Real estate investment exchange

Need Help with a 1031 Exchange?

If you're considering a 1031 exchange, consulting with a Qualified Intermediary and tax professional can help ensure compliance with IRS regulations and maximize your tax benefits.

Contact Us Now