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.
Section 1031 Exchange
Primary authority: IRC §1031
The authority behind it
IRC §1031
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked 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.
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