1031 Exchanges


1031 Exchange Services

For investors considering selling a real estate investment and deferring tax payments on their capital gains, a 1031 exchange could be an option for reinvestment. Understanding the complex guidelines for the 1031 exchange process can be challenging. However, with the right professional services, the process can be more convenient and accessible for any Accredited Investor.

As an investor, you can gain several advantages from finding experts who have the resources and experience to handle your exchange logistics. Working with the professionals can save you time and energy while reducing the potential for stress. When you understand your options for exchanging your investment property holdings according to IRS guidelines, you can confidently move forward.

What is a 1031 Exchange?

The term 1031 Exchange is defined under section 1031 of the IRS Code. To put it simply, this strategy allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long as another “like-kind property” is purchased with the profit gained by the sale of the first property.

The IRS Outlines several rules that must be followed for a transaction to qualify for tax deferral through a 1031 exchange. Rules address which types of real estate can be utilized for an exchange and how proceeds from the sale of the relinquished property must be handled throughout the exchange, how and when replacement property must be identified, and required timelines for closing on the replacement property.

Breakwater’s Guide to
1031 Exchanges

Three Essential Rules of a 1031 Exchange

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.

Which Properties Qualify for a 1031 Exchange?

According to IRS Section 1031, both the relinquished and the replacement properties must be held for investment purposes, and they must be “like-kind” properties. Property held for investment purposes can include a multitude of real estate types, but most are rental properties or commercial real estate. Personal residences and vacation homes that are not utilized primarily as rentals do not qualify for a 1031 exchange. “Like-kind” simply refers to the fact that investment real estate must be exchanged for investment real estate. 


In other words, investment real estate cannot be exchanged for stock, debt, or other investments in a 1031 exchange. Also, a 1031 exchange applies only to real estate located in the United States.

Replacement Property
Identification Guideleines

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.

1031 Exchange
Time Limit

The “Exchange Period”

The most important deadlines for a 1031 exchange are the identification and closing dates. Weekends and holidays are included in the deadlines. Investors must adhere strictly to the timeline in order to complete a successful 1031 exchange.

  • 45-Day Rule: Within 45 days of the close of escrow for the relinquished property, an investor must identify any replacement property that will be purchased to complete the exchange.
  • 180-Day Rule: Within 180 days of the close of escrow for the relinquished property, an investor must close on the purchase of the replacement property identified to complete the exchange.


Exchanger sells relinquished property any proceeds are escrowed with a Qualified Intermediary.


The Cut-Off

Identify up to three replacement properties within 45 days of the close of escrow



The purchase of the replacement property(ies) must be completed within 180 days

Exchanger Sells Relinquished Property

Identify Replacement Properties

Purchase Replacement Properties

Taxes can be Costly

If you complete the exchange successfully within that time, you will qualify to defer taxes on your capital gains for the investment. The first 45 days of the 1031 exchange are crucial, since you must complete thorough research and due diligence within the time window. To navigate the process efficiently, have a plan before you get started. 

The chart on the left 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. 

1031 Exchange Performance Over Time

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.

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.

A Step up in Basis

Inheritance Benefits

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.

Challenges of a 1031
Exchange ›

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

Can Be Difficult To Diversify Portfolio

No Guarantee That Replacement Can Equal Success

Investor Could Be Limited To Local Properties

Exchangeable Ownership Structures

Most investors only look at exchanging property for property, but a closer examination may prove a different approach may be a better fit.

Side by Side Comparrison

While the above are typical representations of offerings, individual offerings may vary. You must always review the offering documents to ensure that the risks and objectives align with your own.