Section 1031 of the Internal Revenue Code allows an investor to sell a property and reinvest the proceeds into a new property ("like-kind") while deferring all capital gains taxes. It is the primary wealth-building tool for real estate dynasties.
The Timeline (Strict!)
There is zero wiggle room here. If you miss a deadline by one day, the exchange fails and you owe the tax.
- Day 0: Sale of the Relinquished Property closes. Funds go to a Qualified Intermediary (QI).
- Day 45: Identification Period ends. You must submit a list of potential Replacement Properties to the QI.
- Day 180: Exchange Period ends. You must close on the Replacement Property.
Identification Rules
During the 45-day period, you typically use one of these rules:
- 3-Property Rule: Identify up to 3 properties of any value. (Most common).
- 200% Rule: Identify any number of properties, as long as their total value doesn't exceed 200% of the sold property's value.
Boot
To defer 100% of the tax, you must reinvest all of the equity and replace all of the debt. Any cash you keep ("cash boot") or debt reduction ("mortgage boot") is taxable.
Delaware Statutory Trusts (DSTs)
What if you can't find a property in 45 days? Many investors use a DST as a backup. A DST allows you to buy a fractional interest in a large, institutional-grade property (like an Amazon distribution center) to satisfy the exchange requirements without active management duties.
Conclusion
A 1031 Exchange requires a team: a Qualified Intermediary, a tax advisor, and a broker who can find deliverable product within the tight 45-day window.