A 1031 Exchange, also known as a tax deferred exchange, allows an investor to defer capital gains tax on the sale of investment property by "exchanging" that property for other "like-kind" property. All real estate held for business or investment purposes is considered like-kind property for a 1031 exchange. For example, an investor can exchange a residential rental for another residential rental, or a commercial property, or land.

In an exchange the property that is sold is called the "Relinquished Property" and the property that is acquired is called the "Replacement Property." The deferred capital gains tax on the relinquished property becomes due when the replacement property is eventually sold, unless that property is also converted into a 1031 exchange. Under current law, the deferred tax liability is forgiven upon the death of the taxpayer.

Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The requirements of Section 1031 and other sections must be carefully met. The transaction must be structured in such a way that it is in fact an exchange of one property for another, rather than the taxable sale of one property and the purchase of another. The IRS's regulations make exchanging easy, inexpensive, and safe.

Important Deadlines

Exchange Period= 180 days. The exchange period begins on the day the Relinquished Property closes. The acquisition of Replacement Property must be completed within the180 day Exchange Period.

Identification Period= 45 days. The exchangor has 45 days from the close of Relinquished Property to identify Replacement Property. Three alternative properties can be identified and the exchangor has the remainder of the Exchange Period (135 days) to close on at least one of the identified properties.

Important Exception to the 180 day rule. If the Relinquished Property is sold after October 18th of the calendar year, the Exchange Period ends on April 15th of the following calendar year. The exchangor can take advantage of the full 180 day exchange period if they request and are granted a tax extension by the IRS.

View IRS Section 1031

A Ten Thirty-One Exchange Corp. 2011 Botulph Road
Suite 200
Santa Fe, NM 87505
505-982-1031 phone
505-982-5211 fax
800-500-1031