1031 Exchange: The Basics, Rules and What to Know

Named after Section 1031 of the Internal Revenue Code, a like-kind exchange allows an investor to sell an investment property and reinvest the proceeds into another property — deferring federal (and often state) capital gains taxes entirely.

The Four Rules

1. Like-kind: Both properties must be held for investment or business use.
2. Equal or greater value: The replacement must be of equal or greater value to defer 100% of the gain.
3. Same taxpayer: The entity that sells must be the same entity that buys.
4. Use a qualified intermediary: You cannot touch the proceeds — a QI holds them between transactions.

When Does a 1031 Make Sense?

A 1031 makes the most sense when you are selling a property with significant appreciation or deferred depreciation and want to upgrade to a larger or higher-quality asset. It also works well for geographic diversification or pivoting from management-intensive to passive income.

TMG works with qualified intermediaries and tax advisors across the Southwest to help clients structure successful exchanges.