Section 1031 Exchange
Authority: IRC §1031
A 1031 exchange lets a real estate investor sell investment or business real property and defer all capital gains tax and depreciation recapture by rolling the proceeds into replacement real property of equal or greater value. Since 2018 the provision applies only to real estate, not equipment or crypto. The mechanics are unforgiving: sale proceeds must be held by a qualified intermediary (the seller may never touch the cash), replacement property must be identified in writing within 45 days of the sale, and the purchase must close within 180 days. Receiving any cash or debt reduction ("boot") triggers gain to that extent. The deferred gain carries into the new property through a reduced basis, so tax comes due when the chain ends, unless the investor holds until death, when the basis step-up permanently erases the deferred gain. This "swap till you drop" pattern is a cornerstone of generational real estate wealth.
Example
An investor sells a rental for $900,000 with a $400,000 built-in gain, routes proceeds through an intermediary, identifies a replacement in 30 days, and closes on a $1,100,000 property in 120 days. The entire $400,000 gain, and its depreciation recapture, is deferred.
Related terms
Depreciation Recapture
Depreciation recapture is the rule that claws back prior depreciation deductions when an asset is sold at a gain....
Step-Up in Basis
The step-up in basis resets the tax basis of inherited assets to their fair market value on the owner's date of...
Long-Term Capital Gains
Long-term capital gains are profits from selling capital assets, such as stock, crypto, real estate, or a business,...
Installment Sale
An installment sale spreads gain recognition over the years payments are actually received when at least one payment...
Stop looking terms up and start putting them to work.
Amadae runs your books, your quarterly estimates, and your tax strategy on autopilot, so concepts like this one turn into actual savings.
Book your free review