Selling investment real estate? Learn about a 1031 exchange.

March 1, 2023 - Selling investment real estate? Learn about a 1031 exchange

1031 exchanges may make sense for investors looking to defer capital gains tax on the sale of property and replace it with a new real estate investment. This can be beneficial for investors who are looking to maximize cash flow, defer depreciation recapture taxes, or buy more property.

At Evermay, we have worked with clients to help explain the rules, benefits, and timeline of a 1031 exchange, enabling our clients to understand the process and make the most of such a transaction. We have also worked with real estate specialists to help them find the right replacement property. Contact your Evermay advisor if you think a 1031 exchange may make sense for you.

What is a 1031 exchange and how do they work?

1031 exchanges, also known as like-kind exchanges, allow investors to defer capital gains tax on the sale of property by replacing it with a new real estate investment. This is done by following a specific set of rules, which are outlined in section 1031 of the Internal Revenue Code.

In order to qualify for a 1031 exchange, the property being sold and the property being purchased must both be classified as “like-kind”. This means that the properties must be of the same nature or character, even if they are different in quality or grade. The transaction must also be an exchange for business or investment purposes, not for personal use.

In order to complete the 1031 exchange, the investor must first identify the replacement property within 45 days from the date of the sale of the original property. The replacement property must then be purchased within 180 days of the sale of the original property, or the investor must file their tax return for the year in which the sale took place.

Finally, the investor must complete a 1031 exchange agreement with a qualified intermediary, who will hold the proceeds from the sale of the original property until they are used to purchase the new property. This helps to ensure that the exchange is done in accordance with the rules and regulations governing 1031 exchanges.

Overall, 1031 exchanges can be a way for investors to defer capital gains tax on the sale of property and replace it with a new real estate investment. By following the rules outlined in section 1031 of the Internal Revenue Code, investors can take advantage of the tax benefits associated with such exchanges.

References for additional information:

  1. IRS, “Like-Kind Exchanges Under IRC Section 1031,”
  2. Journal of Accountancy, “Like-kind exchanges of real property,”
  3. The Balance, “A Guide to 1031 Property Exchange.”
  4. Wall Street Journal. “Selling Your Investment Property?”

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