Named after Section 1031 of the IRS code, a 1031 exchange lets you sell an investment property and defer all capital gains tax and depreciation recapture — as long as you reinvest the proceeds into another investment property of equal or greater value.
Key rules:
- 45-day rule: Identify replacement property within 45 days of closing
- 180-day rule: Close on the replacement property within 180 days
- Like-kind: Nearly any US real property qualifies (single-family, multifamily, commercial, land)
- Qualified intermediary: A neutral third party must hold the funds between transactions
- Equal or greater value: Replacement property must be worth at least as much as what you sold
1031 exchanges are one of the most powerful wealth-building tools in real estate — you can repeat them indefinitely and potentially eliminate the deferred tax via a step-up in basis at death.
Related Terms
Return on Equity (ROE)
Annual cash flow divided by your current equity in the property — measures efficiency of deployed capital.
Depreciation Recapture
Tax owed on previously claimed depreciation deductions when a rental property is sold.
LLC for Real Estate
Limited Liability Company — a legal entity used to hold investment properties and limit personal liability.