1031 Exchange

What is a 1031 exchange?

A 1031 exchange (named for Section 1031 of the tax code) lets a real estate investor sell an investment property and roll the full proceeds into a replacement property without paying capital gains tax or depreciation recapture at sale. The tax is deferred, not forgiven: the old property’s basis carries into the new one, and the bill comes due if you ever sell without exchanging again.

The rules are strict and unforgiving. Both properties must be held for investment or business use (not personal residences or flips). From the day your sale closes you have 45 days to identify potential replacements in writing and 180 days to close on one. A qualified intermediary must hold the sale proceeds throughout, if you touch the money, the exchange fails. To defer all tax, the replacement must cost as much as what you sold and all equity must be reinvested; any shortfall or cash taken out is taxable "boot."

Exchanging serially is a cornerstone of real estate wealth-building, sometimes called "swap till you drop": each exchange compounds pre-tax dollars into larger properties, and at death heirs receive a stepped-up basis that permanently erases the deferred gains and recapture. The strategy’s costs are intermediary fees (typically $750 to $1,500), tight timelines that can force rushed purchases, and carried-over low basis that shrinks future depreciation deductions.

Worked example

You sell a rental for $500,000 that you bought for $300,000, facing roughly $60,000 of combined capital gains and recapture tax. Instead, a qualified intermediary holds the proceeds, you identify three candidate properties within 45 days, and close on a $550,000 replacement within 180 days. All $60,000 stays invested, working for you in the larger property.

Frequently asked questions

What are the deadlines for a 1031 exchange?

Two clocks start the day your relinquished property closes: 45 calendar days to identify replacement properties in writing to your qualified intermediary (typically up to three candidates, or more under value-based rules), and 180 calendar days to close on the replacement. Both include weekends and holidays, and the IRS grants no extensions except in declared disasters. Most failed exchanges die on the 45-day identification deadline, so experienced exchangers begin shopping before they sell.

Can I 1031 exchange into a REIT or fractional shares?

Not directly into REIT shares or most fractional platforms, Section 1031 requires like-kind real property, and securities do not qualify. Recognized workarounds include Delaware Statutory Trusts (DSTs), which are fractional interests in institutional property that do qualify, and the two-step 721 UPREIT route (exchange into a DST, later contribute to a REIT’s operating partnership). Each has liquidity and fee trade-offs worth studying first.

What happens to the deferred tax if I die owning the property?

It disappears. Your heirs inherit the property at a stepped-up basis equal to fair market value at your death, wiping out the accumulated deferred gains and depreciation recapture from every exchange in the chain. This "swap till you drop" endgame is why serial 1031 exchanging is such a powerful multi-generational strategy under current law.

Related tools and guides

• 1031 Exchange Guide
• 1031 Exchange Calculator