1031 Exchange

§1031 Tax-Deferred Exchange ## What Is a §1031 Exchange? Section 1031 of the Internal Revenue Code allows a taxpayer to defer capital gains taxes on the sale of investment or business-use real property by reinvesting the proceeds into a "like-kind" replacement property. The tax is not eliminated — it is deferred until the replacement property is eventually sold in a taxable transaction. For California brokers working with investors, understanding §1031 exchange mechanics is essential. A $1M gain on a California investment property could trigger $380,000 or more in combined federal and California capital gains taxes — the §1031 exchange is the most powerful tool available to defer this liability. --- ## Basic Requirements To qualify for full tax deferral: 1. Like-kind property: Both the relinquished (sold) and replacement properties must be held for productive use in a trade or business, or for investment. The "like-kind" standard is broad — an apartment building can exchange for a commercial retail center, which can exchange for raw land. - NOT eligible: Primary residences, inventory (property held for sale), personal property (after TCJA 2017 — real property only) 2. Same taxpayer: The same entity/individual who sells must be the buyer on the replacement side. An individual cannot sell and have their LLC buy. 3. Timeline — 45/180 Rule: - 45-day identification deadline: From close of the relinquished property, the taxpayer has 45 calendar days to identify potential replacement properties in writing to the Qualified Intermediary - 180-day acquisition deadline: The replacement property must close within 180 calendar days of the relinquished property closing - Both deadlines are strict — no extensions except in federally declared disasters 4. Equal or greater value: To defer…