How Does a 1031 Exchange Work?
The mechanics of deferring capital gains by reinvesting sale proceeds into like-kind real estate.
The core idea
Section 1031 of the Internal Revenue Code lets you defer capital gains tax when you sell real property held for investment or business use and reinvest the proceeds into other like-kind real property. The tax isn't forgiven; it's postponed and generally carried into the new property through your basis.
The key players
You (the exchanger), a qualified intermediary who holds the proceeds, your closing agent, and your tax advisor. The intermediary must be engaged before the sale closes.
The timeline
From the day your sale closes, you have 45 days to identify replacement property in writing and 180 days to complete the purchase. Both deadlines run at the same time and are not extended for weekends or holidays.
Full vs. partial deferral
To defer all gain, you generally must buy replacement property of equal or greater value, reinvest all net equity, and replace any debt that was paid off. Anything left over is called boot and is usually taxable.
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Schedule a Strategy CallEducational information only; not tax, legal, or investment advice. DSTs involve risk, including loss of principal, and are available only to accredited investors. Consult your own advisors.