What is a 1031 exchange in real estate and how does it work?

A real estate 1031 exchange, also known as a like-kind exchange, is a tax deferral strategy used in real estate investment. It allows an investor to sell a property and defer paying capital gains tax on the sale by using the proceeds to purchase a similar property within 180 days. The key to a successful real estate 1031 exchange is to ensure that the properties being traded are of a “like-kind”.

This means they must be investment properties, such as rental properties or commercial properties, and not personal properties, like a primary residence. The 1031 exchange process is managed by a qualified intermediary who handles the transfer of funds between the two parties. By utilizing a real estate 1031 exchange, investors can defer paying taxes on their gains, allowing them to reinvest their capital into additional real estate properties.