Investors
How do I do a 1031 exchange?
By Steve Lockhart
The short answer
A 1031 exchange, named for the section of the tax code, lets you sell an investment property and put the proceeds into another investment property without paying capital gains tax at the sale, deferring it until you eventually sell without another exchange.
Full answer
A 1031 exchange, named for the section of the tax code, lets you sell an investment property and put the proceeds into another investment property without paying capital gains tax at the sale, deferring it until you eventually sell without another exchange. The mechanics are strict: you cannot take the money, even briefly. The proceeds must go from the sale, through a qualified intermediary who holds them, to the replacement purchase, and you must use a full reinvestment of the net proceeds and an equal or greater value and debt to defer the full gain.
The deadlines are famous and unforgiving. You have 45 calendar days from the sale closing to identify the replacement property or properties in writing to the intermediary, under specific identification rules. Then you have 180 days total, or the earlier of 180 days or your tax filing deadline with extensions, to close on the replacement. Miss either deadline and the exchange fails, and the tax comes due.
Eligibility is narrower than people think. The property you sell must be held for investment or business use: a rented home, an apartment building, land held for investment, or commercial property qualifies, and after the tax law change, only real property qualifies at all. Your primary residence does not, a vacation home you use personally generally does not without care, and a flip bought to resell does not, because dealer property was never held for investment. The practical advice is to line up the intermediary, the replacement strategy, and a tax advisor before you list the property, because the 45-day clock starts the day you close, not the day you feel ready.
A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.
Go a little deeper
Frequently asked
Questions investors often follow up on
Can I do a 1031 exchange on my primary residence?
No. A primary residence does not qualify as like-kind investment property, and it has its own separate exclusion rules under the tax code. The exchange is for property held for investment or business use.
What happens if I miss the 45 or 180 day deadline?
The exchange fails, the deferral is lost, and the gain becomes taxable in the year of the sale. There are no extensions for either deadline, which is why the replacement plan and financing have to be in motion before the sale closes.
Do I have to buy one bigger property, or can I buy several?
You can buy one or multiple replacement properties, and even partial interests in some structures, as long as you meet the identification rules within 45 days and complete the purchases within 180 days. The rules for how many properties and values you can identify are specific, so the intermediary walks you through them.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: the exchange is planned before the listing. We map the sale, the intermediary, the replacement search, and the financing timeline against those two immovable deadlines, and we keep the tax advisor in the room, because a deferred tax that becomes due is just an expensive mistake.
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