UNLOCKING THE POWER OF A 1031 EXCHANGE: A SMART MOVE FOR REAL ESTATE INVESTORS
If you’re a real estate investor looking to grow your portfolio without giving a big portion of your profits to the IRS, the 1031 Real Estate Exchange is a powerful tax strategy you should know
about. It’s one of the best tools in the tax code for deferring capital gains taxes and keeping more of your equity working for you.
At EntryPoint Wealth Management, I often work with clients who are building wealth through
real estate. Whether it’s a rental property, commercial space, farms, or vacant land, real estate
is a key part of many retirement and income strategies. The 1031 Exchange allows you to
reposition your real estate holdings without triggering immediate tax consequences—if done
correctly.
WHAT IS A 1031 EXCHANGE?
A 1031 Exchange, named after Section 1031 of the IRS tax code, allows you to defer
capital gains and depreciation recapture taxes when you sell one investment property and
reinvest the proceeds into another “like-kind” property (meaning both the property you sell and the one you buy must be for investment or business use and not personal residences).
This is not a loophole—it’s a legal, IRS-approved strategy designed to promote economic growth by encouraging reinvestment in real estate.
KEY BENEFITS OF A 1031 EXCHANGE
- Tax Deferral: You don’t pay capital gains taxes at the time of sale, allowing more money to be reinvested.
- Portfolio Growth: You can exchange into higher-value or higher-income-producing properties.
- Geographic Diversification: Move your investments into different markets to match your financial goals or lifestyle.
- Consolidation or Diversification: Exchange several properties into one (or vice versa) to simplify management or spread out risk.
- Lower-Effort or Passive Investments: Transition from high-maintenance properties into lower-effort properties without triggering a taxable event.
- Estate Planning: Upon death, heirs receive a step-up in cost basis, potentially avoiding capital gains taxes altogether.
BASIC RULES YOU NEED TO FOLLOW FOR A 1031 EXCHANGE
Timing and structure are everything in a 1031 exchange. Here are a few key rules:
1. Like-Kind Property: Both the property you sell and the one you buy must be for investment
or business use (not personal residences).
2. 45-Day Rule: After you sell your property, you have 45 days to identify potential replacement properties.
3. 180-Day Rule: You must complete the purchase of the new property within 180 days of the sale.
4. Use a Qualified Intermediary: The exchange must be facilitated by a neutral third
party to handle the funds between transactions—you can’t touch the proceeds directly.
5. Reinvestment Requirements: To fully defer taxes, you must reinvest all proceeds and
acquire property of equal or greater value.
6. Loans Must Match: If Debt is held against the property being sold, it must be maintained to the new property at the end of the exchange or boot could be created, leading to a tax obligation.
COMMON 1031 EXCHANGE SCENARIOS
- ⚫ Swapping a single-family rental for a small apartment building
- ⚫ Exchanging multiple residential rentals into a commercial office building
- ⚫Moving from active property management to a passive Investment model. (Tenants in Common or Delaware Statutory Trust)
SHOULD YOU CONSIDER A 1031 EXCHANGE?
A 1031 exchange may be a smart financial strategy if you’re:
- ⚫Nearing retirement and want to simplify your real estate holdings
- ⚫Sitting on a property that has appreciated significantly
- ⚫Looking to diversify into new markets or property types
- ⚫Planning to build multi-generational wealth through real estate
- ⚫Seeking passive income in retirement
But it must be done with care and proper planning. One misstep and the IRS could disqualify the exchange, triggering full capital gains taxes.
FREQUENTLY ASKED QUESTIONS
Can I live in the replacement property I acquired in a 1031 Exchange?
Your exchange eligible property must be held for investment purposes, meaning it is not your primary residence. Different tax rules are applicable to primary residence, that said, a vacation home that you hold for investment can qualify for 1031 exchange.
Can I use a 1031 Exchange to move my investments closer to where I plan to retire?
Definitely. A 1031 exchange is a great tool to adjust your real estate investments to fit your lifestyle, especially if you relocate and want to relinquish landlord responsibilities.
How many times can I use a 1031 Exchange?
You can exchange real estate as many times as you like. In fact, many 1031 exchangers plan to “swap til they drop” and hold properties until their estate can recognize the special tax treatments.
Is there a minimum or maximum dollar amount for doing a 1031 Exchange?
NO. But you should have reasonable tax benefits to swapping the property otherwise, you can sell and obtain the proceeds.
What happens if I miss one of the deadlines involved in an Exchange?
These deadlines are important, which is why it’s critical to partner with an experienced professional on this sophisticated strategy. If a deadline is missed, it will trigger taxation – the worst outcome if you plan to avoid it.
What’s the most common reason to consider a 1031 Exchange?
Retirement. When you decide to reduce the burden of managing your rental properties, an exchange is a wonderful tool to reposition your investment to be “hands off” (or passive), avoid paying income tax, and continue receiving investment income from your investments.
What Taxes will I be avoiding by completing an exchange?
By facilitating an exchange, you will shelter your investment growth from Depreciation and Capital Gains taxes. Depreciation Recapture tax is always levied at 25 or 28% and Capital Gains taxes can range from 0%-24% depending on your income in the year of the exchange.
LET'S TALK STRATEGY
A well-executed 1031 Exchange can help retirees transition while keeping more of their hard-earned wealth. The key is to do it correctly.
As a financial advisor who understands both tax implications and long-term investment strategy,
I help clients evaluate whether a 1031 Exchange aligns with their retirement goals, cash flow needs, and estate plans. A 1031 is a powerful tool—but it’s only one piece of the puzzle. If you’re considering selling an investment property, let’s talk before the sale. The earlier you plan, the more options you have.
Schedule a personalized strategy session with me today to see if a 1031 Exchange is right for you.
EntryPoint Wealth Management | Helping You Make Smarter Financial Decisions With Real
Estate and Retirement In Mind
CHRIS WARD, CFP®
Chris has been helping clients as a Financial Advisor since 2007 and established EntryPoint Wealth Management as an opportunity to offer clients access to his best partnership for financial advice. He works as an integrated partner with you and your financial life, to help you better your financial situation and achieve your goals.
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