If you’re a commercial real estate investor looking to defer capital gains taxes and reinvest profits into bigger, better assets — a 1031 exchange might be your most powerful tool. But this process is complex and time-sensitive. Here’s what you need to know to execute a successful exchange.
What Is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the IRS tax code, allows you to sell an investment property and reinvest the proceeds into another “like-kind” property — deferring capital gains taxes in the process. This strategy is widely used by investors to scale portfolios, shift into better-performing markets, and preserve equity.
Key Rules to Know:
- 45-Day Identification Window: You must identify potential replacement properties within 45 days of selling the original property.
- 180-Day Completion Window: You must close on the replacement property within 180 days of the sale.
- Like-Kind Requirement: Properties must be of the same nature — e.g., commercial for commercial — but they don’t have to be identical (e.g., retail to multi-family is allowed).
- Use a Qualified Intermediary: You cannot touch the proceeds of the sale. A third-party intermediary must handle the funds.
Common Mistakes to Avoid:
- Waiting too long to identify replacement properties.
- Trying to use personal funds before the exchange is complete.
- Not vetting the replacement property’s financials and due diligence properly.
Benefits of a 1031 Exchange:
- Tax deferral, which means more capital to reinvest.
- Portfolio diversification or consolidation.
- Improved cash flow with upgraded properties.
Final Thought:
Executing a 1031 exchange is not something you want to navigate alone. At Rise Commercial, we guide our clients through each step — from property identification to close — ensuring compliance, speed, and smart reinvestment strategies.