What is a 1031 exchange and how does it work?

A 1031 exchange lets you sell investment property and reinvest proceeds into "like-kind" property without paying capital gains tax. Strict timeline applies.

Section 1031 of the IRS code lets investors defer capital gains tax when they sell one investment property and reinvest the proceeds into another. The deferred tax stays deferred until you eventually sell out of the cycle. Three rules: (1) The replacement property must be "like-kind" - any US investment real estate qualifies as like-kind to any other US investment real estate (rental SFR can exchange into commercial, multifamily, raw land, etc.). (2) Identification window: you must identify replacement properties within 45 days of the relinquished property closing. Up to 3 properties can be identified, or more under specific value rules. (3) Closing window: you must close on the replacement property within 180 days of the relinquished property closing. The 45-day window runs concurrently inside the 180. A qualified intermediary (QI) must hold the proceeds during the exchange - if you touch the money, the exchange is invalidated. Common pitfalls: missing the 45-day window, buying replacement worth less than relinquished (creates "boot" that is taxed), and failed exchanges that flip into immediate tax liability. Plan with a CPA familiar with 1031 from the moment you list the relinquished property.