A 1031 exchange — named for Section 1031 of the Internal Revenue Code — lets an investor sell business or investment real estate and reinvest the proceeds into a new property while deferring capital gains tax on the sale. It’s one of the most powerful wealth-building tools available to real estate investors, and it’s a major reason net-lease and commercial real estate remain popular vehicles for long-term investors across the Southeast.
This guide covers the basics: how the exchange works, the rules that govern it, and where to go for the details that matter for your specific situation.
This post is general and educational. It is not tax or legal advice. Always consult a qualified CPA, attorney, and qualified intermediary before undertaking a 1031 exchange.
How a 1031 Exchange Works, at a High Level
In a standard (forward) 1031 exchange, the process runs roughly like this:
- You sell your relinquished property (the one you currently own).
- The sale proceeds go directly to a qualified intermediary (QI) — you never personally touch the funds, which is essential to the exchange’s validity.
- Within 45 days of closing on the relinquished property, you formally identify potential replacement properties.
- Within 180 days of that same closing, you must close on the purchase of one or more of the identified replacement properties.
- If done correctly, capital gains tax on the sale is deferred — not eliminated, but pushed into the future — until you eventually sell the replacement property without doing another exchange (or until you die holding it, at which point heirs can receive a stepped-up basis).
We cover the full 45/180-day timeline mechanics, including what counts as a valid identification, on our timeline and rules page.
What Qualifies for a 1031 Exchange
The property being sold and the property being acquired both need to be held for investment or business use — not a primary residence in the ordinary case, though there are narrow exceptions worth understanding on our primary residence page. Since 2018 tax reform, 1031 treatment is limited to real property; personal property and most other asset classes no longer qualify.
Commercial real estate of nearly any type can work as either the relinquished or replacement property — office, retail, industrial, multifamily, and net-lease investment properties are all common. NNN properties in particular have become one of the most popular replacement property choices because they’re relatively passive and can close quickly compared to more complex acquisitions.
The Role of the Qualified Intermediary
You cannot receive the sale proceeds directly at any point in the process — doing so disqualifies the exchange entirely. A qualified intermediary holds the funds between the sale and the purchase and handles the required exchange documentation. Choosing the right QI, and understanding what they can and can’t do for you, is worth getting right before you start the clock. See our qualified intermediary page for more detail — including why Doug, as your broker, cannot legally serve as your own QI on a transaction he’s brokering.
Common Variations on the Standard Exchange
The forward exchange described above is the most common structure, but several variations exist for specific situations:
- Reverse exchanges, where you acquire the replacement property before selling the relinquished one — useful when you find the right replacement property first. See our reverse 1031 exchange page.
- Partial exchanges, where you don’t reinvest 100% of the proceeds, triggering partial tax liability on the portion not reinvested (known as “boot”). See our partial exchange and boot page.
- Exchanges into a Delaware Statutory Trust (DST) instead of direct ownership — a securities-based structure with its own trade-offs. See our DST vs. direct ownership comparison.
- Exchanges held in an LLC, which carry specific rules about single-member vs. multi-member structures. See our LLC ownership page.
Common Mistakes That Derail an Exchange
The 45/180-day deadlines are strict, and a handful of avoidable mistakes account for most failed or partially-failed exchanges — missed identification deadlines, touching sale proceeds directly, and misunderstanding what counts as “like-kind” property among them. We cover the most common pitfalls in detail on our common mistakes page.
Working Under a Deadline
If you’re already under contract to sell and racing the clock, the most important thing you can do is start lining up replacement property options and a qualified intermediary as early as possible — ideally before your relinquished property even closes. Schedule a 1031 consultation or contact us directly to talk through your specific timeline.
Frequently Asked Questions
What is a 1031 exchange in simple terms? It’s a tax rule that lets you sell investment real estate and reinvest the proceeds into another investment property while deferring the capital gains tax you’d otherwise owe on the sale.
How long do you have to complete a 1031 exchange? You have 45 days from the closing of your relinquished property to formally identify replacement properties, and 180 days total to close on the purchase of one or more of them.
Can you do a 1031 exchange on a primary residence? Generally no — the property must be held for investment or business use. There are narrow exceptions and related strategies; see our primary residence page for detail.
Do you have to reinvest all the proceeds in a 1031 exchange? No, but any proceeds not reinvested (called “boot”) are typically subject to capital gains tax, even though the rest of the exchange still qualifies for deferral. See our partial exchange page.
How much does a 1031 exchange cost? Costs vary based on the qualified intermediary’s fee, transaction complexity, and whether a reverse or more complex structure is involved. Contact us for a sense of typical costs for your specific situation.
Can an LLC do a 1031 exchange? Yes, though the rules differ depending on whether the LLC is single-member (disregarded for tax purposes) or multi-member. See our LLC ownership page for the details.
