1031 Exchange

A 1031 exchange (named for Internal Revenue Code Section 1031) lets a real estate investor defer federal capital gains tax and depreciation recapture by reinvesting the proceeds from the sale of investment or business-use real property into other "like-kind" real property. The tax is not forgiven; the deferred gain carries over into the basis of the replacement property and remains deferred until that property is sold in a taxable transaction. To qualify, both the relinquished and replacement properties must be held for productive use in a trade or business or for investment, the investor must identify replacement property within 45 days of closing the sale, and must acquire it within 180 days. The proceeds cannot be received by the investor; they are held by a qualified intermediary. Since the 2017 Tax Cuts and Jobs Act, Section 1031 applies only to real property, not personal property such as equipment or artwork. A properly structured exchange can also be used with fractional interests in a Delaware Statutory Trust, allowing investors to move from active ownership to passive, professionally managed real estate while preserving deferral.