A 1031 exchange allows real estate investors to swap one rental property for another and delay paying capital gains taxes. The taxes aren’t avoided, just deferred to when you eventually sell the new property. There are specific requirements:
Only applies to investment real estate, not primary residences
Can’t be used for flips – must be rented out for 1+ years first
Must use a third party intermediary to hold funds when selling the old property and buying the new
Once you receive proceeds in your own account, the exchange is void
Must identify the replacement property in writing within 45 days of selling the original
Must close on the new property within 180 days of selling the original
Main benefit is being able to upgrade rental properties while deferring taxes. But specific procedures must be followed with the intermediary and timing. Don’t assume regular sales can be undone as 1031 exchanges after the fact. Consult with an intermediary upfront before selling anything.
