What Is a 1031 Tax-Deferred Exchange?

Understanding 1031 Exchanges

Before diving into the definition of a 1031 Exchange, it’s important to note that these transactions are sophisticated tax-deferral and wealth-building strategies. Because they involve legal and financial complexities, it is always advisable to seek guidance from qualified legal, tax, and financial professionals before proceeding with a 1031 Exchange.

What Is a 1031 Tax-Deferred Exchange?

A 1031 Exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains taxes when selling a qualifying investment or business-use property and reinvesting the proceeds into another like-kind property. This tax-deferral mechanism enables real estate investors to preserve their capital by reinvesting the full amount of their proceeds rather than losing a portion to immediate taxation.

By using a 1031 Exchange, investors can keep their entire equity working for them instead of paying a significant percentage—often around one-third—toward capital gains and depreciation recapture taxes. However, to qualify for tax-deferral treatment, the transaction must adhere to strict IRS regulations, including specific identification and reinvestment timelines.

For a more detailed breakdown of how 1031 Exchanges work, key requirements, and strategies for maximizing tax benefits, download our Complete 1031 Exchange Guide .