Question 1

What are the basic requirements of a 1031 exchange?

Accepted Answer

FOR COMPLETE TAX DEFERRAL, INVESTORS MUST:

1. Reinvest 100% of net sales proceeds into the replacement property;

2. Acquire an equal or greater amount of debt on the replacement property;

3. Identify potential replacement property within 45 days from the date of sale;

4. Close on the replacement property within 180 days from the date  of sale;

5. Use a Qualified Intermediary (QI) to coordinate the exchange

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Question 2

Is a Qualified Intermediary or "QI" needed to complete a 1031 exchange?

Accepted Answer

Yes, to avoid a realized taxable gain on the sale of your investment property, you cannot take direct "constructive receipt" of the sales proceeds, otherwise you will realize the capital gain and depreciation recapture on your closing date. To properly defer a realized gain, you should engage a Qualified Intermediary for every 1031 exchange before the closing of sale. The Qualified Intermediary will help you include language in your sales contract with your intent to initiate a 1031 exchange and help you through the entire exchange process to ensure it's completed correctly.

Question 3

Do I have to exchange into the same type of property I sold?

Accepted Answer

No, the IRS defines "like-kind" broadly by nature and character, not by type, allowing investors the ability to exchange into almost any type of investment or business real estate such as multifamily, healthcare, industrial, student housing, retail, anchor tenant grocery, self-storage, hospitality, undeveloped land and oil/gas mineral rights. For example, an investor can initiate a 1031 exchange from the sale of a rental house into a commercial building -or- an undeveloped land investment -or- an oil/gas mineral rights investment and it will be considered a "like-kind" exchange under the rules.

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Question 4

What are the rules in identifying a replacement property?

Accepted Answer

Three Property Rule
An exchange investor may identify up to three properties of any fair market value and purchase any (or all) of them, regardless of total value. This is the most commonly used identification rule.

-OR-

200% Rule
An exchange investor may identify an unlimited number of properties provided the total fair market value of all properties identified does not exceed 200% of the fair market value of the relinquished property and may purchase as any (or all) of the identified properties.

-OR-

95% Rule 
If the exchange investor identifies properties in excess of both of the above rules, then the taxpayer must acquire 95% of the value of all properties identified.

Question 5

Can I extend my 45-day specific identification period for a 1031 exchange?

Accepted Answer

No, unless you are eligible for an extension due to a federally declared disaster, the IRS does not allow for extensions...not even to the next business day if the deadline falls on a weekend or holiday. Be sure you know the exact expiration date of your 45-day window using our online calculator.

Question 6

How long do I have to hold a property to qualify for a 1031 exchange upon sale?

Accepted Answer

A property is generally considered investment real estate if held for investment or business purposes for at least 12 months and a day. For 1031 exchanges, a 2-year hold is considered a safe harbor. The primary requirement is demonstrating the intent to hold the property for investment purposes rather than resale.

Each exchange investor has unique circumstances and should consult their tax and/or legal advisors to determine if the property qualifies as an investment property.

Question 7

Can I use a 1031 exchange for the sale of my home?

Accepted Answer

No, a tax-free 1031 exchange is only allowed for properties that are held for investment or business related uses. Properties that are owned for personal use are not considered investment properties even if they've significantly increased in value. Please consult a Qualified Intermediary or QI for additional information.

Question 8

Does a vacation or second home qualify for a 1031 exchange?

Accepted Answer

Yes, you can initiate a 1031 exchange on a vacation home or second home, but only if it qualifies as an investment property by meeting strict IRS rules. The rules primarily include rental activity at fair market value for at least 14 days, each year, over a two year period and minimal personal use (no more than 14 days or 10% of rental days, whichever is greater) during each of those two years. Essentially, you have to prove the intent that the property was held for investment purposes and not for personal enjoyment.

Keep in mind that renting to friends and family members that do not pay a fair market rent is still considered personal use.

Question 9

If the property I sold DOES NOT qualify as an investment property, is there anyway to defer the capital gain?

Accepted Answer

Yes. Starting January 1, 2027, an investor may reinvest a portion or all of a short-term or long-term realized gain from sale of any asset (stocks, bonds, real estate, business, art, crypto, etc.) into an Opportunity Zone 2.0 fund (aka OZ 2.0). This allows an investor to defer and reduce their capital gain tax liability and potentially face no capital gains or depreciation recapture on Opportunity Zone investments if held for at least 10 years.

For more information visit here: https://www.exclusiveadvisors.com/private-tax-benefits (https://www.exclusiveadvisors.com/private-tax-benefits)

Question 10

Do my heirs still get a step-up after a 1031 exchange?

Accepted Answer

Yes, for tax purposes a property sold and then exchanged is treated as if it was never sold. Should an exchange investor pass away while holding a 1031 exchange property, under current tax rules, the heirs would get an immediate "step-up" from the oriignal basis to the fair market value as of the date of death so they will not inherit any capital gain liabilities.

Question 11

Can I take cash out of a 1031 exchange?

Accepted Answer

Yes, there are two ways you can take a cash distribution from the sale of a property during a 1031 exchange. One method is taxable and the second method is non-taxable.

Method One: Taxable
Taking a partial cash distribution during a 1031 exchange transaction is considered taxable "boot". Taxable boot is any cash or non-like-kind property you receive in an exchange. This includes cash leftover after the exchange and any mortgage debt that was not replaced during the exchange.

Method Two: Non-taxable
Some Delaware Statutory Trusts or DSTs are structured to include an option to elect a substantial non-taxable refinance distribution post-close of the 1031 exchange. These  DSTs typically have institutional, credit quality tenants with long-term, non-recourse, credit-based financing approaching 85% LTV. This strategy allows exchange investors to exactly match their required exchange need and receive a cash-out distribution that is greater than the net after-tax amount that would have been received by paying the capital gains on a property sale outright.

Due to the complex nature of a cash-out DST strategy, it is important for exchange investors to consult their own accounting and tax professionals, as each investor's tax circumstances are unique.

Question 12

Can I exchange into multiple properties?

Accepted Answer

Yes, one of the advantages of a DST or Delaware Statutory Trust is the typical low minimum investment of around $100,000 which allows an exchange investor to diversify into one or more DSTs across different property types and geographic locations.

Question 13

Is there a maximum cap to the amount I can defer in a 1031 exchange?

Accepted Answer

No. The One Big Beautiful Bill Act, which was signed into law on July 4th, 2025, did not repeal or impose a maximum cap on 1031 exchanges. There is no indication that the current administration will be looking to alter the current 1031 exchange rules.

Question 14

What is a 1033 exchange and how is it different than a 1031 exchange?

Accepted Answer

IRS Section 1033 most commonly governs the tax consequences when a property is sold at fair market value to the government through eminent domain for legitimate public purpose like building roads, schools and utilities. This transaction is referred to as an “involuntary conversion” since the loss of property is beyond the control of the owner. Section 1033 does not require a Qualified Intermediary or QI. In a 1033 Exchange, the owner can receive the sales proceeds and hold them until a replacement property is purchased.  If not all the proceeds are used towards acquiring a replacement property, the owner is taxed on the difference.

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