1031 exchanges: trade up without paying the tax bill — yet
The short answer
A 1031 exchange lets you sell investment real estate and roll the proceeds into new investment real estate while deferring capital gains and depreciation recapture. The rules are procedural and unforgiving: a qualified intermediary holds the money, you identify replacements within 45 days and close within 180, and to defer everything you buy equal or greater value and debt. Done repeatedly and held until death, the deferred gain can disappear into a stepped-up basis.
Who this works for — and who it doesn't
Good fit
- Investors trading appreciated property into larger or better-located assets
- Owners facing big recapture after years of depreciation (or cost seg)
- Long-horizon holders playing the basis step-up endgame
Not a fit
- Your primary residence — different rules entirely (§121)
- Flips held for sale rather than investment
- Sellers who need the cash — touching proceeds ends the exchange
How it works
- Engage a qualified intermediary before closing the sale — this cannot be retrofitted.
- Sell; proceeds go straight to the QI.
- Identify in writing within 45 days — commonly up to three candidate properties.
- Close within 180 days on one or more identified properties.
- Match value and debt to defer fully; any cash or debt reduction you pocket is taxable boot.
A worked example
Nina sells a fourplex for $1.4M (basis $600,000 after depreciation) and exchanges into a $1.6M small apartment building.
Nina's exchange vs. a taxable sale
Illustrative only — recapture rates, state tax, and boot change the math; the deadlines don't.
Common mistakes that draw IRS attention (or just blow the exchange)
- Closing the sale before the QI is in place
- Missing the 45-day identification (there is no grace period)
- Taking "just a little" cash out at closing — that's taxable boot
- Trading into related-party deals without the holding rules
Frequently asked questions
What are the 1031 deadlines?
From the day you close the sale: 45 days to identify replacement property in writing to your qualified intermediary, and 180 days total to close. The clocks run together, include weekends and holidays, and almost never extend.
Can I touch the sale proceeds?
No. The money must go from closing to a qualified intermediary. Funds that hit your account — even briefly — are taxable. The QI must be engaged before you close the sale.
Do I have to buy something more expensive?
To defer all the gain, the replacement should be of equal or greater value with equal or greater debt (or added cash). Buying down triggers tax on the difference — 'boot.'
What happens to the deferred gain eventually?
It rolls into the new property's basis. Many investors exchange repeatedly and hold until death, when heirs receive a stepped-up basis — the 'swap till you drop' endgame. Selling for cash at any point triggers the accumulated gain and depreciation recapture.
Selling an investment property this year?
Talk to us before you list — the exchange has to be structured before closing, and we'll model exchange vs. sale (and the recapture) so you choose with real numbers.
Book a free consultation