Home / Glossary / 1031 Exchange
1031 Exchange
A tax-deferred swap of one investment property for another, deferring capital gains taxes.
Definition
A 1031 Exchange (named after Section 1031 of the Internal Revenue Code) allows an investor to sell an investment property and defer all capital gains taxes by reinvesting the proceeds into a like-kind replacement property. The exchange must follow strict rules: a qualified intermediary must hold the funds, a replacement property must be identified within 45 days, and closing must occur within 180 days. Both the original and replacement properties must be held for investment or business use. A 1031 exchange preserves your full equity for reinvestment rather than losing 20-30% to taxes. Many investors use 1031 exchanges to move from smaller to larger properties or from less desirable to more desirable markets.
How This Relates to DSCR Loans
DSCR loans work well with 1031 exchanges because the qualification is property-based. The new property's DSCR is what matters, not how you sourced the equity.
Related Terms
Capital Gains
The profit realized from selling a property for more than its original purchase price.
Depreciation Recapture
The IRS requirement to pay taxes on accumulated depreciation deductions when a property is sold.
Buy and Hold
Purchasing rental properties and holding them long-term for cash flow, appreciation, and tax benefits.
Equity
The difference between a property's market value and the outstanding mortgage balance.
Compare rates from hundreds of lenders instantly. No personal info required.