Definition
A real estate transaction where like-kind property is exchanged to defer recognition of capital gains tax, governed by IRC Section 1031 (also called a 1031 exchange or like-kind exchange).
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Find my pathAbout this term
Tax-deferred exchanges allow real estate investors to defer federal income tax on capital gains by exchanging property for similar property. If you own an apartment building and exchange it for another apartment building of equal or greater value, you don't recognize the gain at the time of exchange. You only pay tax when you eventually sell without reinvesting in like-kind property. Like-kind means real property held for investment or business use—almost any real property qualifies (a rental house exchanges for vacant land, an office building for a retail property). Personal residences don't qualify. The exchange rules are strict: you have 45 days to identify replacement property and 180 days to close, or you lose tax deferral. You must use a qualified intermediary (you can't directly exchange with another person). You can do multiple exchanges in a lifetime, continuously deferring taxes. The basis 'carries forward'—your tax basis in the new property includes the deferred gain from the old property, so tax is eventually due. Exchanges are complex, requiring careful structuring to satisfy IRS requirements.
Pro Tip
1031 exchanges require strict adherence to timelines. Mark your calendar: identify replacement property within 45 days, and close on replacement property within 180 days. Missing these deadlines destroys tax deferral.
Example
An investor owns a rental house with $200,000 of gain. They exchange it through a qualified intermediary for a different rental property of equal value. They recognize no gain in the exchange year; taxes are deferred until they eventually sell the new property without reinvesting.