A 1031 exchange allows investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into another qualifying “like-kind” property.
To qualify, the IRS requires strict adherence to specific rules governing eligible property types, handling of sale proceeds, identification of replacement properties, and required timelines for closing. When executed properly, a 1031 exchange can be a very powerful tool for preserving capital and continuing appreciation.
The investment properties exchanged must be “like kind” meaning they are the same in nature and character.
The value of the replacement property must be equal to or greater than the value of the relinquished property to obtain a full deferral.
The title of ownership on the replacement property must be the same as on the relinquished property.
To qualify for a 1031 exchange, both the relinquished and replacement properties must be held for investment purposes and meet the IRS definition of “like-kind.” Investment properties may include a wide range of real estate types, most commonly rental or commercial assets.
Primary residences and personal-use vacation homes generally do not qualify. “Like-kind” refers broadly to the exchange of investment real estate, rather than to property type or asset class
The IRS outlines three ways that a replacement property can be identified
Allows an investor to identify up to three potential replacement properties and close on any or all of them to complete the exchange.
Allows any number of properties to be identified as long as their total value does not exceed twice the value of the relinquished property. As in the case of the 3-Property Rule, once identified, any or all of the potential replacement properties can be purchased to complete the exchange.
Allows an investor to identify an unlimited number of properties, but the investor must purchase 95% of the aggregate fair market value of all of the properties identified.
The “Exchange Period”
A successful 1031 exchange is defined by strict and non-negotiable timelines. Investors have 45 days from the sale of the relinquished property to identify replacement property and 180 days to complete the acquisition. Adhering to these deadlines is critical.
The first 45 days are often the most challenging, as they require efficient due diligence, disciplined decision-making, and access to suitable replacement options. Having a clear strategy and professional guidance in place before the exchange begins can significantly reduce risk and improve outcomes.
Qualified Intermediary (QI): If an investor takes direct receipt of proceeds from the sale of a relinquished property, the transaction will not qualify for a 1031 exchange.
To prevent this, the IRS requires the use of a Qualified Intermediary (QI). A QI is an independent third party that facilitates 1031 exchanges by holding the sale proceeds and ensuring the transaction complies with IRS regulations
The chart on shows the potential tax savings you could experience by utilizing a 1031 Exchange. This is an example, it is important to know your individual tax situation.
As a real estate investor, you are able to perform an unlimited number of exchanges throughout your lifetime. By not taking a tax hit every time you sell a property, your ability to strive to generate wealth increases exponentially. Without a doubt it is the single most valuable tax exemption the government is providing the public. If the plan is to reinvest your funds into more real estate, you are severely hindering yourself by not taking advantage of the 1031 exchange.
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The above illustration is intended to demonstrate hypothetical mathematical principals, and it is not a guarantee of performance. There can be no certainty that any investment will achieve its stated objectives.
Capital gains and depreciation recapture taxes can be deferred indefinitely through the use of 1031 exchanges. This tax burden can be avoided permanently through a “step up in basis,” whereby heirs inherit property and realize a basis adjustment to the current market value as of the date at death or alternate valuation date. Heirs realize gains and taxes on sales only on those gains above this new, potentially higher valuation. Additionally, the heirs receive a new depreciation schedule, which can be utilized to shelter the property’s income from taxes.
Every year, hundreds of thousands of investors subject themselves to the anxiety that comes with the challenge of completing a 1031 exchange. IRS imposed deadlines and the challenge of finding a “Goldilocks” property can be a daunting to an investor. That anxiety, however, is avoidable by working with a trusted advisor and planning ahead.
Limited Timeframe To Identify Replacement Properties
High·Risk Of Unsuccessful Close
Difficult To Diversify Portfolio
No Guarantee That Replacement Can Equal Success
Could Be Limited To Local Properties
Sole ownership is the most direct form of real estate ownership, providing the investor with full control over the asset. The owner holds title outright and is responsible for all decisions related to operations, financing, and disposition
The primary advantage of sole ownership is control; however, that control comes with full responsibility. The owner bears all property-level liabilities and, in most cases, must personally guarantee any financing. Sole-ownership typically requires recourse debt, obligating the owner to repay the loan regardless of the asset’s performance.
This structure is best suited for investors who want hands-on management and have substantial net worth and liquidity to acquire, operate, and maintain real estate independently.
Limitations of Sole Ownership
For most high-net-worth investors, sole ownership can significantly limit diversification. Even relatively small commercial properties often require purchase prices between $1 million and $3 million, with down payments ranging from $500,000 to $1.25 million.
Larger institutional-grade commercial properties frequently command purchase prices exceeding $15 million, with down payments well above $6 million. These capital requirements can concentrate risk in a single asset or market.
Tenant-in-Common (TIC) ownership references a way of taking title to real estate with each owner possessing an undivided, fractional interest in an entire property. Tenant-in-Common investment structures began in the 1600s in England. They provided real estate investors an alternative to partnerships. They are popular because of their tax-deferred exchange qualifications. In the past 9 years, the Tenant-in-Common structure has been packaged as an investment security, and it has become common for individual real estate investors in completing their 1031 exchanges.
As the nation’s real estate market heated up through the early to mid 2000s, 1031 exchange investing became even more popular. However, the IRS-imposed time restrictions on the 1031 exchange became difficult for investors to meet. As a result, the Tenant-in-Common structure began to be packaged more regularly as a security in early 2001 and 2002.
Investors were able to make much smaller investments to access commercial and institutional quality real estate to complete their 1031 exchange. Furthermore, many Tenant-in-Common properties came “pre-packaged” with due diligence information and financing already in place. This allowed investors to more easily identify and close on investment real estate and comply with the 1031 guidelines.
Whether a Tenant-in-Common structure is applied with two investors or up to 35 investors (the IRS limit), the structure and setup are the same. Owners possess an undivided interest in the property according to their proportionate investment and are able to receive 100% of their share of the potential cash flow, tax benefits, and sale profits from the property.
Similar to a TIC, a Delaware Statutory Trust (DST) allows investors to own fractional, undivided interests in institutional-quality real estate while remaining compatible with a 1031 tax-deferred exchange. Offerings are typically syndicated and structured in advance, with due diligence, financing, and closing coordinated to align with strict 1031 exchange timelines. This pre-packaged structure can simplify the identification and acquisition process for exchangers.
A key distinction between the two structures lies in ownership and control. In a TIC, investors hold direct title to the real estate and often participate in property-level decisions. In a DST, investors hold a beneficial interest in the trust, not direct title. All major decisions are made by the trustee and professional asset manager, making the DST structure entirely passive.
Unlike TICs, a DST may accommodate up to 499 investors. This expanded capacity allows for lower minimum investments and significantly enhanced diversification opportunities.
DSTs are generally well-suited for investors seeking passive, professionally managed real estate, particularly those completing a 1031 exchange. This structure is appropriate for investors who are focused on potential income generation, long-term ownership, and reduced management responsibilities.