1031 Exchange to Defer Capital Gains & Build Wealth


1031 Exchanges are excellent tools to reduce income taxes. It allows investors to sell real estate without requiring immediate payment of capital gains. Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. However, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received.


Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an multi-dwelling building would generally be like-kind to another multi-dwelling building and a parcel of land to another parcel of land. However, real property in the United States is not like-kind to real property outside the United States even if its the same nature of character.

Pros of Like-Kind Real Estate Exchanges

The greatest benefit of a like-kind property exchange is that it allows investors to avoid capital gains taxes. Instead, the full sales profit can be put toward a new, income-earning property—or many of them. A 1031 exchange provides the investor the opportunity to defer 100 percent of realized capital gains. This equates to an interest-free, no-term loan on taxes due until the property is cashed-out. Most often, the capital gain taxes are deferred indefinitely because investors continue to exchange from one property to the next, and increasing the value of their real estate investments with each exchange. If used correctly, there is no limit on how many times or how frequently you can do 1031 exchanges.

45 Day & 180 Day Rule

Within 45 days of the sale of your property, you must designate the replacement property by submitting an offer for another like-kind property. You can not receive the cash or it will spoil the 1031 treatment. The second timing rule is you must close on the new property within 180 days of the sale from the old property you held as a 1031 exchange.