Definition
Section 1031 of the IRC allows investors to defer capital gains taxes by exchanging one investment property for another of "like kind." The investor must identify replacement properties within 45 days and close within 180 days. A qualified intermediary must hold proceeds during the exchange period. This powerful tool allows investors to defer taxes indefinitely, growing wealth through sequential property upgrades.
lightbulb Example
An investor sells a $500K rental property (bought for $300K). Instead of paying $40K in capital gains tax, they do a 1031 exchange into a $700K property. The $200K gain is deferred. Over a career, multiple 1031 exchanges can defer millions in taxes.
Combine 1031 exchanges during life with step-up in basis at death to potentially eliminate capital gains taxes entirely on real estate.
verified_user Key Points
- Tax-deferred swap of investment properties
- 45 days to identify, 180 days to close
- Must use qualified intermediary
- Cannot be used for primary residence