Introduction to 1031 Exchanges

"...in this world nothing is certain but death and taxes," Benjamin Franklin wrote in 1789.  His grim insight remains true over two centuries later, but at least there's a glimmer of relief in the tax area.  Since 1990, there's been a reprieve for those of us facing capital gains taxes.

The term "1031 exchange" comes from the Internal Revenue Code (IRC) Section 1031.  This arrangement is also referred to as a "like kind exchange," a "tax deferred exchange," or a "Starker exchange." 

The 1031 exchanges involve real estate and personal property.  The real estate rules are less restrictive than the personal property exchange rules, which expressly prohibit the exchanges of stocks, bonds or partnership interests ( see the Federal Forms and Guidelines section ).

1031 Exchanges - General "Like Kind Exchange" Illustration

Using real property, for a simplistic example, let's say that you purchased a property a few years ago for $50,000.  You decide to sell it and have found a buyer who will pay $200,000.  Theoretically, you have a $150,000 profit and may need to pay capital gains on that $150,000.  Rather than paying capital gains taxes on the $150,000, you can purchase another property -- or like-kind property -- for $200,000 and defer paying capital gains until you sell your like-kind property at a profit.  "Like kind" does not mean "exact."  Your $200,000 investment can be on

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improved or unimproved real estate anywhere in the country. 

There are time constraints set forth in the IRC.  You need to identify your replacement property within 45 days of the sale of the initial property, and then close on the replacement, or like-kind, property within half a year or 180 days.  Plan ahead with a qualified intermediary or Realtor.  You might also want to consider consulting with a lawyer.  LegalMatch (link opens in new window)  is an excellent service if you do not already have an attorney.  At no charge, you can type in your legal needs and prequalified attorneys will respond by posting in your secure online member area, not by phone or email.  They will let you know their rates, qualifications, etc., and you choose the lawyer that you are most comfortable with.  You can post your question anonymously and are under no obligation to hire any of the attorneys that contact you.

Additional Exchange and Tax Information

Throughout this evolving site, you'll find advice and research from experts in 1031 exchanges.  If you would like to contribute an article with a link to your website or resource, please be sure to to do so !

You might also find our " tax blurbs " of interest.  These are articles and news snippets generally relating to income and property taxes.