What Are the Rules for a 1031 Exchange? A Guide

A 1031 exchange is named for Section 1031 of the Internal Revenue Code. It allows real estate investors to defer federal (and in most cases state) capital gains taxes when selling an investment property, provided they reinvest in a like-kind replacement property following specific rules.

Rule 1: Like-Kind Property Requirement

Both the relinquished and replacement properties must be "like-kind" — meaning both must be real property held for investment or productive use in a trade or business. Real estate in the US exchanges for real estate in the US. Different property types (apartment building for commercial) qualify.

Rule 2: Must Use a Qualified Intermediary

You cannot touch the exchange funds. A QI (Qualified Intermediary) must hold the proceeds from your sale and transfer them to close on your replacement property. Using a QI properly is required by the IRS.

Rule 3: 45-Day Identification Window

Within 45 days of closing on your relinquished property, you must formally identify potential replacement properties in writing. You may identify up to 3 properties (3-property rule) or any number up to 200% of the relinquished value (200% rule).

Rule 4: 180-Day Closing Requirement

You must close on the replacement property within 180 days of closing on the relinquished property, OR by the tax filing deadline (including extensions) for that tax year — whichever comes first.

Rule 5: Equal or Greater Value

To defer 100% of your gain, the replacement property must be equal to or greater in value than the relinquished property, and you must use all net proceeds. Any cash taken out is considered "boot" and is taxable.

Contact Samimi CRE Advisors to start planning your 1031 exchange in Los Angeles.