Topic 06 · 6 min read
1031 Like-Kind Exchanges
Swap, don't sell.
Sell an investment property outright and tax is due on the gain. Roll the proceeds into another investment property under Section 1031 and the tax is deferred instead, leaving the full amount working in the next deal.
What to know
- The clock
- Identify replacement property within 45 days of closing and complete the purchase within 180 days. These deadlines are effectively unforgiving.
- Qualified intermediary
- A neutral third party must hold the money. Touching the proceeds yourself ends the exchange.
- Like-kind is broad
- Almost any US real property held for investment or business trades for almost any other — raw land for an apartment building is fine. Personal residences are not.
- Reverse and build-to-suit
- You can buy first and sell second, or use exchange funds to improve the replacement property, with extra structure and cost.
- Swap till you drop
- Exchange repeatedly through life, and heirs may receive a stepped-up basis that erases the deferred gain entirely.
The tax benefit
Capital gains tax and depreciation recapture are deferred, so 100% of the equity moves into the next property instead of 70 or 80 percent.
Worked example
Boot bites
An investor exchanges into a cheaper building and pockets $50,000 of the proceeds. That $50,000 is boot and is taxable, even though the rest of the exchange is valid.
Watch out for
- Set up the intermediary before closing — it cannot be fixed afterward.
- Replacement debt must generally match or exceed the debt relieved.
- Flips and inventory property do not qualify.
Terms from this topic
Section 1031Qualified intermediaryBoot45-day rule
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