Navigating a 1031 Exchange

Tips for Buyers

Navigating a 1031 Exchange

What to Know About 1031 Exchanges in Real Estate

Real estate investing has long been recognized as a way to to grow one’s personal wealth. And when you work with the right real estate agent, they can help you strategically invest and protect your wealth during real estate transactions. 

One of the methods real estate investors use is a 1031 Exchange. It's a fantastic tool that permits you to sell one investment property and roll the proceeds into a new one, all while deferring capital gains tax

This benefits investors because usually when one sells an investment property for more than they paid, they would have to pay a significant capital gains tax. But with a 1031 Exchange, they can defer those taxes by reinvesting the proceeds into a new property, thus making an exchange instead of a sale. 

There are several rules and guidelines to be aware of when considering a 1031 Exchange.

Like-kind Properties Rule

  • Like-kind properties refer to two real estate assets of a similar nature, regardless of quality, that can be exchanged without attracting any tax liability. 
  • To qualify, properties must be held for investment or business purposes. 
  • Primary and personal residences do not qualify for a 1031 Exchange.
  • Fix & Flip Properties do not qualify as a 1031 Exchange.
  • Properties must be held in the United States to be considered like-kind. 

Three-Property Rule

The federal government states that taxpayers may identify up to 3 potential properties as replacement properties in the exchange if they close on at least one. 

200% Rule

Investors can identify as many replacement properties they desire to purchase if their eventual combined fair market value is at most 200% of their relinquished property. For example, If an investor sells a property for $5 million, the combined market value of the purchase should be no more than twice that or $10 million. 

95% Rule

Investors may ignore the 200% rule and select any number of potential replacement properties for any amount only if they buy 95% of the aggregate value of those properties. For example, If an investor sold a property for $1 million, they could identify ten properties worth $5,000,000. However, they would have to buy at least $4,750,000 worth of those properties or more. 

45-Day Time Limit

In the past, the 1031 Exchange was performed simultaneously. This was an issue because transferring funds and titles quickly took time. Now, investors must identify and report on or close on the potential replacement property within 45 days of selling the original property. This period includes holidays and weekends. 

180 Day Rule

After the sale, an investor has 45 days to identify a new property. Once said property is selected, the investor has 180 days from the date the original property was sold to close for the replacement property. 

There are 4 main types of 1031 Exchange 

4 types of 1031 Exchange


The main reason to pursue a 1031 Exchange is to reinvest capital into more extensive and diverse investments. Because capital gains taxes are deferred, more sale proceeds can be promptly allocated towards new investments. Recently, Biden proposed a change to the 1031 Exchange code for his 2024 budget. Subscribe to the Milieu Homes newsletter for updates on real estate investing policy changes. 

Interested in using a 1031 Exchange? Milieu Homes is here to assist you with your 1031 Exchange journey whether you’re a seasoned investor or a first time seller. Stay tuned for market updates, and feel free to contact us with any questions about the Orange County market.

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