Selling a business or investment property can feel overwhelming. You’ve put time, effort, and money into growing your portfolio. Now that it’s time to sell, a big tax bill shows up.
It’s frustrating, but it doesn’t have to be the end of your story. A 1031 like-kind exchange
is a legal, IRS-recognized way to defer those taxes. It helps you keep more of your sale proceeds working for you instead of handing a large chunk to the government.
Here’s how it works, what qualifies, and why it might be worth exploring, especially if you’re trying to grow or simplify your investments.
What is a 1031 like-kind exchange and how does it work?
A 1031 like-kind exchange lets you sell one property and buy another without paying capital gains taxes immediately. The tax bill doesn’t disappear. It just gets delayed until you eventually sell the replacement property.
The benefit is clear. Instead of paying taxes now, you can reinvest the full amount into your next purchase. That gives you more buying power and more flexibility.
This is not a loophole or a workaround. It’s part of the tax code, designed to help investors and business owners keep growing without being penalized every time they sell a property.
What types of property qualify and what doesn’t?
The IRS sets clear rules on which properties are eligible for a 1031 exchange. Not everything qualifies.
These types of real estate typically qualify:
- Property used for business or held for investment
- Vacant land held for future development or sale
- Apartment complexes or rental properties
- Office buildings, warehouses, or strip malls
These do not qualify:
- A primary residence
- A vacation home used mostly for personal purposes
- Inventory or property meant for resale
- Property located outside the United States
- Equipment or vehicles (since 2018)
If the property is used for business or investment and is located within the U.S., it likely qualifies. Anything used for personal enjoyment or resale purposes usually does not.
What does “like-kind” really mean?
The term “like-kind” sounds more limiting than it is. Many people assume they have to swap the exact same type of property. That’s not the case.
The IRS uses “like-kind” to mean both properties must be real estate held for investment or business use. That’s it. You can get creative with the swap.
Here are a few examples:
- Trade raw land for a retail strip
- Exchange a rental duplex for a commercial office
- Sell a single large property and buy several smaller ones
As long as both properties meet the basic use requirements, the exchange will qualify. The flexibility allows you to adjust your holdings without taking a tax hit every time.
What are the deadlines you need to know?
Two timelines matter most in a 1031 exchange: 45 days and 180 days.
You have 45 days from the date of sale to identify potential replacement properties. This must be done in writing, and you need to follow the IRS identification rules.
You also have 180 days from the sale date to close on one or more of the properties you identified.
These timelines run at the same time. The 180-day countdown starts on the same day as the 45-day identification window. If you miss either deadline, you lose the chance to defer taxes.
Planning ahead is key. Start looking at potential properties before your current one sells, so you don’t run out of time.
Who needs to be involved?
A 1031 exchange comes with a strict rule: you can’t touch the money.
The IRS requires that a Qualified Intermediary (QI) handle the transaction. The QI holds the sale proceeds, manages the paperwork, and transfers the funds directly into the replacement property.
If the money passes through your hands, even for a moment, the exchange is disqualified.
In addition to a QI, many investors work with a tax advisor and a real estate attorney. These professionals help you avoid mistakes and keep your transaction compliant. You don’t need a large team, but you do need the right people involved.
What are the real benefits beyond deferring taxes?
Most people use a 1031 exchange to delay taxes, but there are other strategic benefits.
Here’s what this tool can help you do:
- Upgrade to a larger space or more valuable location
- Diversify your portfolio across regions or property types
- Consolidate several small properties into one
- Split a large property into several smaller investments
- Keep your capital invested instead of paying it to the IRS
A 1031 exchange gives you the freedom to adjust your real estate strategy without penalty. You keep more money in play and more options open.
What are the real-world challenges?
A 1031 exchange can work well, but it takes effort. There are a few hurdles that can trip up even experienced investors.
- Finding the right property quickly
- Making sure the value and financing align
- Meeting IRS rules on deadlines and documentation
One missed detail—like naming the wrong number of properties or failing to close on time—can undo the whole exchange. That’s why even seasoned investors rely on qualified intermediaries and advisors to guide them through the process.
How can you tell if a 1031 exchange is the right fit?
A few simple questions can help you decide:
- Are you selling a property held for business or investment use?
- Are you planning to reinvest the full sale proceeds?
- Is your goal to maintain your portfolio?
- Are you willing to work with professionals to get it done right?
If the answer to most of these is yes, a 1031 exchange might be worth exploring.
The Bottom Line
A 1031 exchange won’t solve every tax issue. But it can give you the breathing room to reinvest your capital without the immediate tax bite.
If you’re planning to sell an investment or business property, don’t assume taxes are the only option. A little preparation now can save you money and help you make your next move with confidence.
Start by reviewing your current property. Talk with a tax advisor. Connect with a Qualified Intermediary. Make sure your strategy fits the rules and your goals.
At DiMercurio Advisors, we’re here to help you explore your options and avoid costly surprises. Reach out today for a practical look at how a 1031 exchange could work for your situation.
