1031 Exchange
A 1031 exchange (named for IRS Code Section 1031) lets an investor sell an investment property and defer capital-gains taxes by reinvesting the proceeds into another like-kind investment property under strict deadlines.
The core rules: the replacement property must be identified within 45 days of the sale and closed within 180 days; proceeds must flow through a qualified intermediary (you can't touch the cash); and to fully defer tax, the replacement must be of equal or greater value with all equity reinvested.
Investors use 1031 exchanges to trade up — consolidating several small rentals into a larger asset, or moving equity from a low-yield market into a higher-yield one — while keeping capital working instead of paying tax on each sale. Always involve a qualified intermediary and tax professional before listing the property you intend to exchange.
Worked example
An investor sells a rental for $400,000 with a $150,000 gain. Instead of paying capital-gains tax now, they identify a replacement within 45 days, close within 180 days through a qualified intermediary, and roll the full $400,000 into a small multifamily property — deferring the entire tax bill.
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