Taxes & Entities

1031 Exchanges

Sell an investment property, buy another, and the tax on the gain waits. The rule is generous and the deadlines are merciless, and the clock is why most failed exchanges fail.

  • Intermediate
  • 9 min total
  • 12 chapters

What decision this helps you make: Whether to roll a property sale into a like-kind exchange or pay the tax and move on, and how to run the exchange so a paperwork mistake does not turn a deferral into a bill.

What this topic is

Section 1031 lets you sell real property held for business or investment and reinvest the proceeds in other real property without paying tax on the gain now. The tax is deferred, not forgiven: your old basis follows you into the new property, so the gain is still there, waiting.

Why it matters

Paying tax on a sale can take a fifth to a third of your gain off the table before you reinvest. Deferring it means the whole amount keeps working, and repeated exchanges compound on pre-tax dollars. But the mechanics are unforgiving: one wire to the wrong account, or one day past a deadline, and the entire deferral is gone.

Who should learn it

Owners of rental property, commercial buildings, land, and farms; anyone repositioning a real-estate portfolio; and business owners who own the building their company operates in.

What you will understand

  • What "like-kind" actually means after the 2017 change
  • The 45-day and 180-day clocks, and why they cannot be extended
  • How to compute the boot that makes part of an exchange taxable
  • What the deferral costs you in future depreciation

Prerequisites

Common misconception

"A 1031 exchange makes the sale tax-free." It makes the sale tax-deferred, which is a different and more interesting thing. Your basis carries over to the new property, so the gain travels with you and shows up on the day you finally sell without exchanging. Two consequences most people miss: your depreciation deductions going forward are computed on the old, lower basis rather than on what you just paid, and the deferred gain disappears entirely only if you hold until death, when the basis steps up for your heirs. The benefit is real. It is the benefit of an interest-free loan, not of a forgiven debt.