1031 Exchange
A 1031 exchange lets a real estate investor defer capital gains tax by reinvesting sale proceeds from one investment property into another like-kind property.
Definition
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, lets an investor sell an investment or business property and defer federal capital gains and depreciation recapture taxes by reinvesting the proceeds into another like-kind property. The tax is not erased, it is carried forward into the new property's basis.
The rules are strict and deadline-driven. Proceeds must be held by a qualified intermediary, not the seller. The investor has 45 calendar days to identify replacement property and 180 calendar days to close. To fully defer tax, the replacement must be of equal or greater value and the investor must reinvest all equity and replace any debt paid off.
For example, selling a $1 million rental with a $400,000 gain could trigger six figures in tax; a properly structured exchange into a $1 million-plus replacement defers all of it. Many investors use DSTs as replacement property to avoid active management.
Key points
- Defers capital gains and depreciation recapture, not eliminates them
- Applies only to investment or business real property, not a primary home
- 45 calendar days to identify, 180 calendar days to close
- Proceeds must be held by a qualified intermediary
- Replacement must be equal or greater value to fully defer tax
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.