1031 Exchange

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What is a 1031 exchange?


A 1031 exchange is a transaction in which eligible property is exchanged for property of likekind and gain or loss is deferred for federal income tax purposes. Normally, when a taxpayer sells property, gain or loss on the sale is recognized in the tax year in which the sale occurs. But in a like-kind exchange, gain or loss on the sale of relinquished property is deferred until the replacement property is sold. A transaction qualifies as a 1031 exchange if it’s an exchange of eligible like-kind properties. Since the Tax Cuts and Jobs Act (TCJA), only real property qualifies for a 1031 exchange.

It is essential for taxpayers engaging in a 1031 exchange to be aware of these concepts and work with qualified tax and legal professionals to ensure compliance with IRS regulations and to make informed decisions to maximize the benefits of the exchange. Additionally, there are specific rules and time frames that must be followed for a successful 1031 exchange.

What type of real property qualifies for a 1031 exchange?


Property is eligible for a 1031 exchange only when it is considered real property under the laws of the state or local jurisdiction where the property is located at the time of the exchange. To qualify as a 1031 exchange, the exchanged properties must be held by the taxpayer for an eligible purpose.

Eligible purposes include:

Must be held either for productive use in a trade or business or for investment.
Water and the air space over (“superjacent” to) land are eligible for a 1031 exchange (e.g., boat slips at a marina).
Unsevered natural products of land can also qualify for a 1031 exchange. Unsevered natural products of land include things like growing crops and timber, mines, wells, and other natural deposits. Natural products like crops, timber, water, ores, and minerals will no longer qualify for a 1031 exchange once they’re severed or removed from the land.

What does not qualify for a 1031 exchange?

  • A sale of property for cash.
  • A sale of a property for cash and reinvestment of the proceeds like-kind property. In order to qualify as a 1031 exchange, a qualified intermediary must be used for the transaction.
  • Property such as inventory, which is held primarily for sale.
  • A primary residence and other property held for personal use is not eligible for a 1031 exchange.
  • Stock, bonds, notes, other securities or evidence of indebtedness or interest.
  • Interests in a partnership (other than a publicly traded partnership).
  • Certificates of trust, certificates of beneficial interests, and choses in action.

Do intangible interests qualify for a 1031 exchange?


Only real property qualifies for a 1031 exchange, but some intangible interests are considered real property under Section 1031. Intangible interests that qualify for a 1031 exchange include:

  • fee ownership
  • co-ownership
  • a leasehold
  • an option to acquire real property
  • an easement
  • stock in a cooperative housing corporation
  • certain shares in a mutual ditch, reservoir, or irrigation company

When is property “like-kind”?


Property is like-kind based on the nature and character of the property. Real property is generally like-kind to other real property, regardless of whether it’s improved or unimproved.

The IRS does not consider the grade or quality of the property when determining whether it’s like-kind.

The property must be located in the United States to qualify.

1031 Exchange Timeline


There are specific timelines and procedures that must be followed to take advantage of the benefits of a 1031 exchange. The entire 1031 exchange timeline can take no longer than 180 days, including a 45-day identification period.





day 45




BY DAY 180


Investors with Property to Exchange


A typical 1031 exchange involving the eventual investment into a DST has three basic steps:


Exchanger sells property, known as the relinquished property, and proceeds are escrowed with a qualified intermediary (QI)


Qualified Intermediary, through a written agreement with the investor, transfer funds for purchase of replacement property.


Exchanger receives beneficial interest in a DST

The Role of a Qualified Intermediary

The QI is a company that facilitates Section 1031 tax-deferred exchanges. The QI enters into a written agreement with the investor where the QI transfers the relinquished property to the buyer, while transferring the replacement property to the investor pursuant to the exchange agreement. The QI holds the proceeds from the sale of the relinquished property in a trust or escrow account in order to ensure the investor never has actual or constructive receipt of the sale proceeds, which would trigger capital gain consequences.

To complete a successful 1031 exchange, exchangers must identify replacement property(ies) within 45 calendar days after their relinquished property transfer. Exchangers can do this by following one of the following three identification rules:

Three Property Rule (most common)
The exchanger can identify one, two or three properties without regard to the value of the property(ies) identified;

200% Rule

The exchanger can identify as many properties as they would like, so long as the aggregate value does not exceed 200% of the value of the relinquished property they are selling. For example: If the exchanger sells a property for $1 M, they can identify properties with an aggregate value of $2M or less;

95% Rule (least common)

The exchanger can identify as many properties as they like for as much value, as long as they acquire 95% of the value of the identified property. For example: the exchanger identifies 10 properties, each valued at $100K. If the exchanger only closes on 9 of them, the entire exchange fails.

Like-Kind Real Estate


To complete a successful Section 1031 tax-deferred exchange. The replacement property must be like-kind to the relinquished property.

Some examples of like-kind properties include:

  • Multifamily Apartments
  • Healthcare
  • Self-Storage Facilities
  • Retail Centers
  • Industrial Waretiouses
  • Student Housing
  • Senior Living
  • Hospitality

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