What is a 1031 Exchange? And why you need it!
If you own any investment property, even a parcel of land, and aren’t familiar with a 1031 Exchange, you’re missing an opportunity to grow your wealth through real estate. My goal is to educate all property owners on the fundamentals of a 1031 Exchange.
What Is a 1031 Exchange?
First, let’s clarify the tax law we’re discussing:
IRS Section 1031 states that no gain or loss will be recognized when exchanging real property held for business or investment purposes, as long as the property is exchanged for another like-kind property. The new property must also be held for business or investment purposes.
Why Consider a 1031 Exchange?
Unlike a primary residence, selling an investment property triggers taxes on any gains. The main reason to use a 1031 Exchange is to defer capital gains taxes, which can be significant. Additionally, it allows you to sell one property and reinvest in a bigger, better property—or even exchange one for two or more investments.
What Does “Like-Kind” Mean?
Contrary to popular belief, “like-kind” doesn’t mean you have to exchange the same type of property (e.g., condo for condo). Any property held for investment qualifies as like-kind. For example, you can exchange a residential property for a commercial property or multi-unit building. You can also swap raw land for a rental property that generates monthly income. These all meet the like-kind requirement.
The 1031 Exchange Timeline: When the Clock Starts Ticking
Once you’ve decided to use a 1031 Exchange, you need to be aware of strict IRS timelines. The Exchange Period lasts 180 days, starting the day you close on your first (relinquished) property. Within this period, there’s a 45-day Identification Window. During this time, you must identify in writing which property or properties you intend to purchase.
No changes are allowed after day 45, and every day counts—including weekends and holidays. The key to reducing stress is planning ahead. Don’t wait to start looking for a replacement property. You can even go under contract on a replacement property before your first sale closes, allowing more time for due diligence, inspections, and appraisals.
How to Start a 1031 Exchange
Starting a 1031 Exchange is simple. Once you decide to participate, find a Qualified Intermediary (QI), also known as an Accommodator. The QI acts as the middleman and holds your funds to ensure you don’t receive “constructive receipt of funds,” which would violate IRS rules. The QI guides you through the process from start to finish.
Note: A title company is not a QI, but they can refer you to one. It’s crucial to have your exchange agreement in place before closing on the relinquished property. If you don’t, you can’t go back and start the process after the sale—this is another IRS rule.
Final Thoughts: Don’t Miss Out on Wealth-Building Opportunities
If you’ve made a significant gain on an investment property, a 1031 Exchange is the best way to defer taxes. Keep your money working for you, and don’t let potential gains go to waste by paying unnecessary taxes. Build wealth and reinvest wisely.
Written by Sheila Long
Regional Sales Executive | Old Republic Exchange Company
C: 480.341.2032 | T: 480.443.6830 – AZ | T: 818.543.6584 – S. Cal
SheilaL@oldrepublicexchange.com | OldRepublicExchange.com
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