GLOSSARY — REAL ESTATE TERMS
1031 Exchange
A 1031 exchange lets an investment property owner defer capital gains tax by reinvesting sale proceeds into a similar (like-kind) property, following strict IRS timelines for identifying and closing on the replacement property.
How the deferral works
Rather than paying capital gains tax on an investment property sale, an owner can roll the proceeds into a new like-kind investment property through a 1031 exchange, deferring the tax liability rather than eliminating it -- the gain carries forward into the replacement property's cost basis.
The critical deadlines
Once the original property closes, the owner has 45 days to formally identify replacement properties and 180 days total to close on one of them. These deadlines are strict and don't extend for weekends or holidays, which is why exchanges require careful coordination between escrow, a qualified intermediary, and the buyer's timeline on the replacement property.
WHAT TO DO IF YOU'RE CONSIDERING A 1031 EXCHANGE
- Line up a qualified intermediary before your current property closes
- Start identifying replacement properties well before the 45-day clock starts
- Confirm the replacement property qualifies as like-kind with your tax advisor
- Build your closing timeline backward from the strict 180-day deadline
Does a 1031 exchange work for a primary residence?
No -- it applies only to investment or business-use property, not a personal residence, though certain converted-use properties can qualify under specific circumstances worth reviewing with a tax professional.
What happens if I miss the 45-day identification deadline?
The exchange generally fails, and the original sale becomes a normal taxable transaction -- there's very little flexibility on this deadline.
Do I need a qualified intermediary?
Yes -- the sale proceeds must be held by a qualified intermediary rather than touched by the seller directly, or the exchange doesn't qualify for tax deferral.