How Does a 1031 Exchange Work?
Introduction
Real‑estate investors often watch a big chunk of profit disappear to capital‑gains tax each time they sell a rental or commercial building. A properly structured 1031 exchange lets you roll that gain into another “like‑kind” property and postpone the IRS bill—potentially forever.
Key Stat: Investors saved an estimated $4 billion in 2024 alone by using 1031 exchanges.
What Is a 1031 Exchange?
Section 1031 of the Internal Revenue Code allows sellers of U.S. investment real estate to reinvest proceeds in a like‑kind property of equal or greater value and defer capital‑gains and depreciation‑recapture taxes.
“Like‑kind” simply means the assets are the same nature—raw land can swap into an apartment complex, for example. Quality or grade doesn’t matter.
Why Consider a 1031 Exchange?
| Benefit | Impact |
|---|---|
| Tax‑free compounding | More equity is reinvested, boosting portfolio value faster. |
| Portfolio realignment | Shift from management‑heavy rentals into triple‑net leases without tax friction. |
| Estate planning | Heirs receive a stepped‑up basis, wiping out deferred taxes at death. |
| Asset diversification | Exchange into mixed‑use, industrial, or sustainable properties now explicitly accepted under 2025 IRS guidance. |
Key Steps in a 1031 Exchange
Identify the Replacement Property: You have 45 days from the sale of your original property to identify a new property or properties to reinvest in.
Complete the Exchange: The entire process, including the purchase of the new property, must be completed within 180 days of the sale.
Use a Qualified Intermediary: To comply with IRS rules, you must use a qualified intermediary to handle the sale proceeds and facilitate the exchange.
Conclusion
A 1031 exchange is an excellent tool for savvy real estate investors, but it requires careful planning and adherence to strict timelines. At DK Law Group, we guide you through each step of the process, ensuring your exchange is executed smoothly and in compliance with all legal requirements. Contact us today to learn more about how a 1031 exchange can benefit your investment strategy.
At DK Law Group, we make the most of your 1031 exchange. Whether you're upgrading, consolidating, or expanding your portfolio, our expertise and comprehensive services ensure a smooth, compliant, and profitable transition. Have questions? Don’t hesitate to call us at (443) 739-6724 or send us an email at diana@dklawmd.com. We’re here to help!