There is a buzz concerning the 1031 Exchange of the Internal Revenue Code. It is a valuable tool that enables real estate investors to defer tax payments on profits from investment property sales. If the investor re-invests, it carries forward into the new property and complies with the 1031 Exchange’s requirements and policies. If the 1031 exchange is done correctly, real estate investors will retain profits from their investments and avoid their capital gain tax liability, possibly forever. The article highlights facts about the 1031 Exchange so investors can seek the maximum gains and benefits.

It is Tax-Deferred and Not Tax-Free

When investors transfer the basis from one property to another, they preserve the profit or gain recognition in the future. When the replacement real estate property gets sold, the original deferred profit and additional profit from the sale of the replacement investment properties is subject to taxation. Real estate investors should understand that there is a distinction between tax-free and tax-deferred, and 1031 Exchange complies with the latter.

 Potential Tax-Deferred Opportunity Forever

Real estate investors appreciate that there is no limit to the number of 1031 Exchanges they can do. It indicates that investors can roll the deferred profits or gains on a property continuously. In addition, the investors can pass the investments to their legal heirs. The accumulation of capital gains is properly handled if investors sell their assets during their lifetimes.

When the property passes to the legal heirs, they comply with a step-up basis. This means that the inherited basis is the fair asset market price value at the time of the death, and heirs don’t have to pay capital gain tax on any gain. Depending on the accumulated capital gain amount, the legal heirs can lawfully avoid paying significant tax amounts by leveraging the benefits of the 1031 exchange.

1031 is Not Applicable to Primary Homes

Real estate investors should know they can use Section 1031 of the Internal Revenue Code for business and investment property. In addition, they should know that 1031 is not limited to real estate investments. They can use it for personal properties, like gold coins, valuable art, and paintings. Certain types of properties are not included in the 1031 Exchange. They are shares of trusts, stock shares, partnership interests, and corporation equity securities. When investors know about the inclusions and exclusions in Section 1031, it helps them to invest wisely.

Like-Kind Exchange is the Only Practice

Properties traded or switched in the 1031 exchange should be like-kind. In addition, the investors should use the old and new properties for business or investment purposes. It doesn’t mean they trade or switch an apartment building for another one. Investors can switch to an underdeveloped office building, multi-house building, or land as they qualify as investment properties.

Understanding Stringent Time Limitations

Often, the 1031 Exchange is a concurrent closing on the sale and purchase, but it is not mandatory. There are two deadlines for paying capital gain tax.

  1. Within 45 days of selling the properties, the investors should identify possible alternative properties in writing to the certified intermediary agent to execute the proceeds from the old property sale.
  2. The investors should complete the replacement property exchange switch at most 180 days after the exchange property sale or the due date of the income tax return for the year of the old property sale.

Naming Multiple Replacement Properties

Internal Revenue Service (IRS) enables investors to name more replacement properties. They might come up with three or more properties without considering their fair marketplace values as long as investors choose one of them within the 180-day timeline. In addition, investors can make multiple properties as long as their market value at the end of the timeline doesn’t exceed 200% of the market value of the old properties as of the trading or switching date.


From the above analysis, it is clear that the 1031 exchange is ideal for different types of properties with investment values in the marketplace. Real estate investors should know and understand the dos of the 1031 exchange and leverage the maximum capital gain profits by deferring tax. Financial advisors and experts believe it is one of the country’s most influential wealth-creating tools available to taxpayers.