§1031 Overview

A Sec­tion 1031 exchange allows an own­er of qual­i­fy­ing real prop­er­ty held for invest­ment or pro­duc­tive use in a trade or busi­ness to exchange that prop­er­ty for oth­er qual­i­fy­ing like-kind real prop­er­ty and poten­tial­ly defer recog­ni­tion of eli­gi­ble gain.

Since 2018, Sec­tion 1031 gen­er­al­ly applies only to real prop­er­ty. Prop­er­ty held pri­mar­i­ly for sale does not qual­i­fy. U.S. real prop­er­ty also is not con­sid­ered like-kind to real prop­er­ty locat­ed out­side the Unit­ed States.

A 1031 exchange gen­er­al­ly defers tax rather than elim­i­nates it. The deferred gain is typ­i­cal­ly car­ried into the basis of the replace­ment prop­er­ty.

A suc­cess­ful exchange involves more than find­ing anoth­er prop­er­ty. Investors must con­sid­er tim­ing, iden­ti­fi­ca­tion rules, Qual­i­fied Inter­me­di­ary require­ments, equi­ty, debt, poten­tial boot, and the qual­i­ty of the replace­ment invest­ment.

Key Point: A 1031 exchange can pre­serve cap­i­tal through tax defer­ral, but tax defer­ral alone does not make a replace­ment prop­er­ty a good invest­ment.

Ref­er­ence Sources

• IRS — Like-Kind Exchanges: Real Estate Tax Tips

Impor­tant: This mate­r­i­al is for edu­ca­tion­al pur­pos­es only and is not tax, legal, account­ing, or invest­ment advice. Sec­tion 1031 out­comes depend on the tax­pay­er’s facts and com­pli­ance with applic­a­ble require­ments.