Is a 1031 Exchange Right for You?

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Learn about Reverse Exchange or 1031 Exchange

Avoid Large Tax Gain When Selling a Business or Investment Property

Is a 1031 Exchange Right for You?


Typically, when a business or investment property is sold and there is a gain taxes will be levied on the gain at the time of sale. Under Internal Revenue Code (IRC) Section 1031 there is an exception that allows the seller to postpone paying tax on the gain. A 1031 exchange, also known as a Like-kind or Starker exchange, is a strategic tool for deferring tax on capital gains. You can leverage it to sell an investment property and reinvest the proceeds in a new one, effectively postponing the tax liability.

With 1031 exchanges you defer capital gains taxes on an investment property when it’s sold—as long as you purchase another like-kind property with the proceeds of the first sale. The term “like-kind” refers to the nature or character of the property, not its grade or quality.

1031 Exchange Rules

As an investor, you’ll want to familiarize yourself with these 1031 exchange rules:

  • Like-kind property. The properties involved in the exchange must qualify as like-kind. It means held for productive use in a trade, business or investment.
  • Investment or business property only. Personal residences don’t qualify for a 1031 exchange.
  • Greater or equal value. To fully avoid paying any tax, the net market value and equity of the property acquired must be the same as, or greater than, the property sold.
  • Same taxpayer. The tax return and name appearing on the title of the property being sold must be the same as the tax return and title holder that buys the new property.
  • Must not receive boot. The term “boot” refers to any additional value received in an exchange that isn’t like-kind property, such as cash, property improvements or debt relief.
  • Reinvest all equity. When you sell a property as part of a 1031 exchange, all of the equity you receive from the sold property must be reinvested into the replacement property.
  • Arm’s length transactions only. When you sell and buy property as part of a 1031, both the sale and purchase need to be arm’s length transactions (not involving family members or other parties you have a personal or close relationship).

Another Option – A 1031 Reverse Exchange

A reverse exchange is a property exchange wherein the replacement property is acquired first and then the current property is sold. A reverse exchange was created to help buyers purchase a new property before being forced to trade in or sell a current property.


One of the downsides of 1031 exchanges is that the tax deferral will eventually end, and you will have a big bill. However, this can be addressed as a part of your estate plan. If you die without selling your property, then your heirs won’t be expected to pay the tax that you postponed. They will inherit the property at its stepped-up market rate value as well.


By adhering to these timelines and rules, you can successfully complete a 1031 exchange and defer capital gains tax on your investment property. It’s always advisable to consult with a tax professional or qualified intermediary for guidance throughout the process. If done correctly, a 1031 exchange can be a powerful tool for building wealth through real estate investment.