When you sell investment or business property, you normally owe income tax on the gain — the difference between your adjusted basis and the sale price. However, Section 1031 of the Internal Revenue Code allows you to defer those taxes if you reinvest the proceeds into another property of “like kind.”
Real estate is one of the most common uses of a 1031 exchange because nearly all real estate qualifies as like-kind, whether improved or unimproved, developed or undeveloped. Certain assets, such as stocks, bonds, notes, partnership interests, and other securities, do not qualify.
How It Works
Contrary to the term “exchange,” you don’t need to find someone to directly swap property with. Instead, Treasury regulations provide safe harbors that allow you to sell your property (the relinquished property) and use a qualified intermediary, trustee, or escrow agent to hold the proceeds until you purchase your replacement property. This ensures you never have direct access to the funds, which is critical to maintaining 1031 eligibility.
It’s important that the 1031 exchange structure be in place before closing on the relinquished property — but it can be documented as late as the day of closing and still qualify.
Key Timelines
- 45 Days – Identification Period
After selling your property, you have 45 days to identify potential replacement properties. - 180 Days – Exchange Period
You must complete the purchase of the replacement property within 180 days of the sale.
Identification Limits:
- You may identify up to three properties of any value, or
- More than three properties, as long as the total value does not exceed 200% of the property you sold.
Why It Matters
A properly executed 1031 exchange can preserve capital, build wealth, and give you flexibility in managing your real estate portfolio. Missing deadlines, handling funds incorrectly, or failing to set up documentation in time, however, can disqualify the exchange and trigger immediate taxes.
That’s why it’s critical to work with a qualified team to guide you through the process and ensure compliance with IRS rules.
Ready to Explore a 1031 Exchange?
At Citizens Title & Closing, our experienced team is here to guide you through the process from start to finish. We’ll coordinate with your qualified intermediary, ensure all documentation is in place, and help you meet important deadlines so you can protect your investment and defer unnecessary taxes.
👉 Contact us today to discuss your transaction and see how we can support your exchange.