1031 Exchange
A 1031 exchange is a federal tax rule that lets you defer capital gains tax by swapping one investment real estate property for another of like-kind, as long as you follow the 45-day identification and 180-day closing deadlines.
What it means
Named after Section 1031 of the Internal Revenue Code, a 1031 exchange (also called a like-kind exchange) lets an owner of investment or business-use real estate sell one property and roll the proceeds into another qualifying property without recognizing capital gain or depreciation recapture in the year of sale. The tax is deferred, not forgiven — it resets on the replacement property's basis and is triggered when that property is later sold outside an exchange (or erased entirely at a step-up if the owner dies holding it).
Since 2017, only real property qualifies. Personal residences, inventory, and stock do not. The relinquished property and replacement property must both be held for investment or productive use in a trade or business.
The rules are strict: you cannot receive the sale proceeds, you have 45 calendar days from close of the relinquished property to formally identify replacements, and you must close on the replacement(s) within 180 days. A Qualified Intermediary (QI) must hold the funds.
Example
Sell an apartment building for $3M with $1M of gain. Within 45 days, identify a $3.2M retail NNN property. Close on it within 180 days using a QI. No tax owed at closing; the deferred $1M of gain rolls into the new basis.
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