MoneyMatters101.com Home
Real Estate Information

20 Real Estate Terms
1031 Tax Exchange
A Home
An Appraisal
Are Homes To Big?
Attention Veterans!
Avoid Fraud
Best Investment
Buying A Home
Buying REOs
Buying Real Estate
Can You Qualify?
Cash vs Home Loan
Clear Title
Climate Change
Closing Costs
Disclosing Material Facts
Distressed Property
Drug Houses
Down Payments
Escrow Information
Escrow Terms
Get Pre-Approved
Fair Housing
First Time Buyer
Foreclosure Guide
Foreclosure Scams
Home Prices
Home Warranties
Home Worth
Housing Statistics
Increase Sale Value
Intentional Default
Interest Rates
Is Now The Time?
Loan Modification
Look For A Bargain
Making An Offer
Market Analysis
Mineral Rights
Overvalued Property
Preparing To Sale
Preparing To Buy
Pricing Your Home
Probate Properties
Property Appraiser
Real Estate
Real Estate Scams
Rental Profits
Revive Market
Security Systems
Sellers Guide
Sell First?
Selling Real Estate
Short Sale I
Short Sale II
Short Sale III
Single Households
Smart-Home Technology
State Agencies
The Housing Crisis I
The Housing Crisis II
You Flinch, You Lose


Email Us


Short Sales




1031 Tax Exchange

When you sell an investment property and buy another one, you may end up with a large capital gain. That's great, but you may have to pay federal and/or state taxes on the gain. To offset the tax liabilities, your tax advisor, attorney, or real estate broker may suggest you participate in a tax-deferred exchange under Section 1031 of the Internal Revenue Code.

A 1031 tax exchange allows you to defer the payment of capital gains taxes by selling a property and then acquiring a "like-kind" property. This means that the property you purchase has to be similar to the one you sell. To be fully tax-deferred, the property you purchase must have value and equity equal to, or greater than, the property you are selling.

The Internal Revenue Service (IRS), by allowing 1031 Tax Exchange, gives taxpayers a way to sell investment property first and then use the funds after the fact to acquire more property without being taxed on the gain from the sale. In other words, the 1031 Exchange allows you to reinvest the proceeds from the sale that would otherwise be paid as capital gains taxes.

Real or personal property can be exchanged provided it is held "or productive use in a trade or business", or "for investment" and exchanged for property that is like-kind that will also be held for one of the same purposes.

There are rules that must be followed:

  • You and the buyer of your property must enter into a Relinquished Property Purchase Contract that contains a "cooperation clause" that obligates the buyer to cooperate in the structuring of the contract as a tax-deferred exchange.
  • Legal documents must be prepared by a Qualified Intermediary. There must be an Exchange Agreement, an Assignment of the Relinquished Property Purchase Contract, A Notice of the Assignment, and instructions to the settlement agent, either a qualified escrow agent or attorney.
  • All documents must be signed before or as of the date of closing. Once the escrow is closed, the escrow agent or attorney then transfers your funds to the intermediary. At no time should you be in receipt of any of the cash proceeds.
  • The property you are buying must be identified within 45 days of the transfer of title of the relinquished property in which you are selling. The purchase of your replacement property must be completed within 180 days from the date of the transfer of the relinquished property or the date of your tax return for the year in which the title of the relinquished property was transferred.
  • After identifying your replacement property, you must enter into a Replacement Property Purchase Contract with the seller. The contract should also contain a "cooperation clause" which obligates the seller to cooperate with you in completing the tax-deferred exchange.
  • The intermediary should then prepare an Assignment of the Replacement Property Purchase Contract, Notice of the Assignment, and instructions to the escrow agent or attorney. All documents must be signed before or as of the date of closing.
  • Once all the conditions of the escrow has been met, the intermediary will deliver the exchange proceeds to the escrow agent or attorney. The title of the Replacement Property will be transferred to you in completion of the exchange.

Although the rules for participating in a 1031 Tax Exchange are relatively simple, unless you have experience with such projects, it is highly recommended that you use the services of a professional who is qualified in such matters.

Book of the Month

Book about investing

Advertise on MoneyMatters101.com


Ask a Real Estate Lawyer Online

We have partnered with JustAnswer so that you can get an answer ASAP.



Accessibility Policy| Terms Of Use| Privacy Policy| Advertise with Us| Contact Us

Use of this web site constitutes acceptance of the Terms of Use.

We are looking to create more mutually beneficial partnerships. If you are interested in partnering with MoneyMatters101.com, send us your proposal.


Link to MoneyMatters101.com