What Are They Anyway?

A 1031 Exchange, also known as a “like-kind” or tax-deferred exchange, is a popular strategy that allows real estate investors to sell – or relinquish, in IRS terminology – an investment property, while also deferring capital gains taxes on the profit by reinvesting the proceeds in a “replacement” property.

The process is relatively straightforward: sell your property, perform a 1031 Exchange, and reinvest your funds into another like-kind property of equal or greater value. Then, you can reap the potential benefits of your investment, including:

The strict timeframes and deadlines around finding a replacement property can be challenging for investors, as well as keeping track of other IRS rules around 1031 Exchanges.

Your replacement property can be any type of investment property located anywhere in the U.S. You can also do the exchange with multiple properties or utilize replacement property interests.

How many properties can I identify for a 1031 Exchange?

There are three ways to formally identify replacement properties: the three-property rule; the 200% rule; and the 95% rule. These rules create a sort of scale for how many properties you can identify and identify what contingencies the identifications rely on.

Can I do a 1031 Exchange from a residential to a commercial property? Vice versa?

Yes and yes, provided both assets are held as investments. For both residential-to-commercial and commercial-to-residential exchanges, the replacement asset must be of equal or greater value and is placed in service as a rental. You can’t exchange your primary residence in any exchange.

What is a partial 1031 Exchange?

A partial exchange means you don’t have to reinvest the entirety of sale proceeds from your relinquished assets. However, any funds not rolled into a replacement asset are subject to capital gains and depreciation recapture taxes.

How soon can I refinance a 1031 Exchange property? 

We suggest a minimum buffer of six months, but longer is better. Keep detailed records about the need for and use of refinanced funds from your exchanged assets to be sure it doesn’t look like you’re creating a step transaction, which could void your exchanges.

What is the role of a Qualified Intermediary (QI) in a 1031 Exchange? 

A QI serves as an interface with the title company or closing attorney in the exchange. Additionally, they hold onto the funds, ensuring they're used only to buy replacement property, pay closing costs or pay off a mortgage or deed of trust covering the relinquished property.

How long do I have to hold property in a 1031 exchange? 

Two years is generally considered the minimum holding period, but there isn’t any definitive language in Section 1031 of the U.S. tax code regarding required hold times.