1031 Exchange
A tax-deferred exchange allowing investors to sell one investment property and reinvest proceeds in a like-kind property while deferring capital gains taxes.
Full Definition
A 1031 exchange (named after Section 1031 of the IRS tax code) allows real estate investors to sell an investment property and defer capital gains taxes by reinvesting the proceeds into a 'like-kind' replacement property. 'Like-kind' is broadly defined — any real property held for investment or business use qualifies. Strict IRS rules apply: the investor must identify the replacement property within 45 days of the sale and close on it within 180 days. A qualified intermediary (QI) must hold the sale proceeds — the investor cannot 'touch' the money. The exchange defers (does not eliminate) taxes; the deferred gain carries forward to the replacement property.
Real-World Example
An investor sells an apartment building for $1,000,000 with a $400,000 gain. By completing a 1031 exchange and purchasing a commercial building for $1,000,000 within the time limits, they defer all capital gains taxes.
How 1031 Exchange Appears on the Real Estate Exam
Common question types, tested concepts, and what to watch out for
Key numbers: 45 days to identify replacement property; 180 days to close. Investor cannot receive the proceeds — must use a Qualified Intermediary. 'Boot' (cash or non-like-kind property received) is taxable.
Related Terms
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