Like-kind exchange
Understand a 1031 exchange before you sell.
If you own business or investment real estate, selling can create a tax bill. A 1031 exchange is a way some investors defer that tax by moving into another property. It is a process with strict rules, not a shortcut.
The exchange
What a 1031 exchange is
A 1031 like-kind exchange lets you defer capital gains tax when you sell business or investment real property and reinvest the proceeds in another like-kind property. For real estate, “like-kind” is broad: most real property held for investment or business use can qualify as like-kind to other real property held the same way.
You do not receive the sale proceeds yourself. A qualified intermediary holds them and uses them to acquire the replacement property. The exchange also has to stay inside IRS timelines. Done correctly, gain that would have been taxed on the sale can be deferred. It is deferred, not erased, and parts of a deal can still be taxable.
In practice
Three things that matter
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The property has to be held for investment or business use.
A 1031 exchange is for real property used in a trade or business or held for investment. A home you live in as your primary residence is not the typical case. How you hold and use a property is a facts-and-circumstances question for your tax advisor.
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A qualified intermediary must hold the proceeds.
If you take control of the sale money, the exchange generally fails. A qualified intermediary, sometimes called a QI, receives the proceeds and applies them to the replacement property. You need a QI for a real exchange. Choosing one, and the contract with them, should be in place before you close the sale.
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The identification and closing deadlines are strict.
From the day you transfer the property you are selling, you generally have 45 days to identify replacement property in writing, and 180 days to close on it. The 180-day period can end sooner if your tax-return due date, including extensions, comes first. Missing a deadline usually ends the exchange. These dates are not flexible, and they start when the relinquished property transfers.
Contact
Talk to us
Questions about how an exchange is structured, or whether it is worth a closer look before you list a property, can start with an email. We will not tell you that you qualify. That determination belongs to a qualified intermediary and your tax advisor.