1031 Exchange Rules: Key Requirements, Deadlines, and Risks
A 1031 exchange lets real estate investors defer capital gains taxes when selling an investment property by reinvesting the proceeds into another like-kind investment property. It applies only to investment real estate, never a primary residence. The main payoff is long-term portfolio growth, since keeping equity invested lets it keep compounding. The rules are specific. You must use a Qualified Intermediary who holds the sale funds, because you are not allowed to touch the proceeds yourself, and users recommend picking one early so they can advise you from start to finish. The replacement property must be like-kind, which in practice means any other real estate held for investment as long as it will not be your primary residence. To defer all capital gains taxes, the replacement must be of equal or greater value than the property you sold. The timing rules are strict: you have 45 days after the sale to identify potential replacement properties and 180 days to close on the purchase. One user suggests spreading all your proceeds into more than one replacement property of equal or greater total value. You cannot use a 1031 to downsize without paying taxes on the unused proceeds, known as boot. The exchange also defers gains rather than erasing them, and depreciation you took on the original rental gets recaptured later, either at sale or when you eventually sell the replacement property.
