Sell an investment property, roll the entire proceeds into the next one, and defer the tax on your gain. It’s one of the most powerful tools in real estate — and one of the easiest to fumble.
A 1031 exchange — named for the section of the tax code that allows it — lets you sell an investment property and reinvest the proceeds into another “like-kind” property without paying capital gains tax at the moment of sale. The tax isn’t forgiven; it’s deferred, potentially for decades, while your capital keeps working at full size.
Why it’s so powerful
Without an exchange, a sale takes a bite — federal capital gains, depreciation recapture, and often state tax — before you reinvest. With one, the whole amount rolls forward. Do it repeatedly and you can climb from a small rental to a substantial portfolio, with the deferred tax compounding in your favor the entire way.
The rules that trip people up
- 45 days to identify. From the day you close the sale, you have 45 calendar days to formally identify the replacement property. No extensions.
- 180 days to close. You must complete the purchase within 180 days of the sale.
- A qualified intermediary must hold the funds. If the sale proceeds touch your bank account, the exchange is dead. A third party has to hold them between transactions.
- Equal or greater value. To defer the full gain, the new property generally must cost at least as much as the one you sold, with all the equity reinvested.
Those 45- and 180-day clocks start at closing and don’t pause for weekends, holidays, or a deal that falls through. The intermediary has to be lined up before you sell, not after.
“Swap till you drop”
Here’s the long game. If you keep exchanging and still hold property at death, your heirs generally inherit it at its current market value — and the deferred gain can be wiped out entirely. It’s a cornerstone of how real estate wealth passes between generations.
The mechanics are strict, but the payoff is enormous when it’s done right. We coordinate the timing, the intermediary, and the numbers so a missed deadline never turns a smart move into a surprise tax bill.