The 1031 exchange represents one of real estate's most powerful tax advantages, allowing investors to defer capital gains taxes indefinitely by reinvesting proceeds into like-kind properties. Mastering the rules enables portfolio growth that would be impossible without this benefit.
Basic 1031 Requirements
Properties must be held for investment or business use. Personal residences don't qualify. Identify replacement property within 45 days of sale. Close on replacement within 180 days. Use qualified intermediary to hold proceeds—never take possession yourself.
Identification Rules
Three-property rule: Identify up to three replacement properties regardless of value. 200% rule: Identify unlimited properties if combined value doesn't exceed 200% of relinquished property. 95% rule: If exceeding 200%, must acquire 95% of identified value.
Advanced Strategies
Reverse exchanges: Acquire replacement before selling relinquished property. Improvement exchanges: Use exchange funds for property improvements. Delaware Statutory Trusts: Fractional ownership in institutional properties for investors wanting passive management.
Common Mistakes to Avoid
Missing 45-day identification deadline—no extensions. Taking cash boot (reducing exchange amount) triggers partial taxation. Not using all proceeds—pay tax on amount not reinvested. Inadequate planning causing identification of unsatisfactory properties.