What is a 1031 Exchange?

IRS-Sanctioned Strategy for Deferring Capital Gains

If you’re selling investment or business real estate, a 1031 exchange under Section 1031 of the Internal Revenue Code allows you to defer capital gains taxes by reinvesting the proceeds into qualifying replacement property.

Instead of treating the sale as a taxable event, a 1031 exchange lets you exchange property you own for new real estate of equal or greater value—without immediately recognizing capital gains. It’s one of the most powerful tax strategies available to real estate investors and business owners.

How It Works: Key Requirements

To qualify for a 1031 exchange and defer taxes, the transaction must meet three essential criteria:

1. Held for Investment or Business Use: Both the relinquished and replacement properties must be held for productive use in a trade, business, or as an investment. Personal residences do not qualify.

2. Like-Kind Property: The properties involved must be of "like-kind"—a broadly defined term that generally includes most real estate held for investment or business, regardless of type or location within the U.S.

3. An Exchange, Not a Sale: The transaction must be structured as an exchange, not a sale followed by a purchase. This is where a Qualified Intermediary like Standard Exchange becomes essential.

📅 1031 Exchange Timeline

The exchange doesn’t have to be simultaneous. You can sell your property first (the "relinquished property") and acquire the new one (the "replacement property") later—within strict IRS timelines:

Below is a visual guide to help you understand the timing requirements that govern a delayed 1031 exchange:

📍 Day 0: Sale of Relinquished Property
→ Funds must be held by a Qualified Intermediary (QI) like Standard Exchange.

⏳ Within 45 Days
→ Identify Replacement Property(ies)

• Must submit written identification to QI

• You may identify up to 3 properties (or more, depending on valuation rules)

📆 Within 180 Days
→ Close on Replacement Property

• Must complete the purchase of one or more identified properties

• Deadline is 180 days from Day 0 (not 45 + 180)

Note: Both the 45-day and 180-day clocks start on the date of sale of the relinquished property—not when the clock starts per each event.

Failure to meet these deadlines disqualifies the exchange and triggers capital gains tax.