Defer Taxes,
Amplify Your Wealth.
IRC Section 1031 is one of the most powerful tools for real estate investors to defer capital gains taxes and maximize their reinvestment capital. See the difference for yourself with the simulator below.
1031 Exchange vs. Taxable Sale: Reinvestment Capital
Adjust the sliders to model your own scenario.
$2,500,000
$800,000
$600,000
$400,000
Additional Capital to Reinvest with a 1031 Exchange:
$595,050
The 4 Core Rules for a Successful 1031 Exchange
Adhering to these rules is the key to deferring your taxes.
Qualified Property
Both the property you sell and the one you acquire must be held for productive use in a trade, business, or for investment.
Strict Timelines
You have 45 days from the sale of your property to identify a replacement and 180 days to close on it. No exceptions.
Qualified Intermediary (QI)
You must use a neutral, third-party QI to hold your sale proceeds. You cannot have actual or constructive receipt of the funds.
Trade Up or Equal
To fully defer taxes, the new property's value and equity must be equal to or greater than the old property's. (Including debt)
1031 Exchange Timeline Visualization
Day 0
Relinquished Property Sold
Day 45
Identification Deadline
Day 180
Exchange Completion Deadline
Exploring Advanced 1031 Exchange Strategies
Beyond a standard exchange, various strategies can be used for specific situations.
Delaware Statutory Trust (DST)
A DST allows multiple investors to pool funds to own a large, institutional-grade property. This is ideal for investors seeking passive income without management responsibilities. It can also serve as an excellent 'backup plan' to mitigate the risk of failing to find a suitable property within the 45-day identification period.
Pros
- Completely passive investment
- Diversification into institutional assets
- Ability to close quickly
Cons
- Low liquidity (long-term hold)
- No control over asset operations
- Various fees involved
Reverse & Improvement Exchanges
A Reverse Exchange allows you to acquire your desired replacement property before you sell your current one. An Improvement Exchange allows you to use exchange funds to build or make improvements on the replacement property. Both involve a complex process where a special entity, the Exchange Accommodation Titleholder (EAT), temporarily holds or "parks" the property.
Partnerships, Vacation & Primary Homes
- Partnerships: A "drop and swap" strategy may allow some partners to execute an exchange, but it carries a high IRS audit risk and requires expert advice.
- Vacation Homes: Can qualify as investment property for a 1031 exchange if you meet the IRS "safe harbor" rules limiting personal use and requiring minimum rental days.
- Primary Residence Combo: Under specific conditions, you can combine the primary residence exclusion (up to $500k tax-free gain) with a 1031 exchange to maximize tax savings.
The Ultimate Estate Plan: Swap 'Til You Drop
When an investor who has been conducting 1031 exchanges passes away, their heirs receive the properties with a "stepped-up basis" to the fair market value at the time of death.
This means all the deferred capital gains tax from a lifetime of exchanges is permanently eliminated—the most powerful long-term benefit of a 1031 exchange.