1031 Exchanges Are for Regular Property Owners, Too

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published 17 August 2025

Millions of Americans have much of their net worth invested in real estate.

Equity in these properties should grow in value over time, but for many, it's "trapped" because it can't be accessed without a sizable capital gains tax obligation when the property is sold.

The result can be missed opportunities as investors hold out for the right market, lower capital gains tax rates or the property getting passed through their estate plan, at which point their heirs could take advantage of a step-up in basis.

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Many know that a primary residence can qualify for the Section 121 tax exclusion, but fewer realize that business or investment properties might qualify for a Section 1031 like-kind exchange, allowing you to defer capital gains taxes.

Each year, small property owners miss out on billions in potential tax savings, wrongly assuming 1031 exchanges are only for big commercial deals.

Here's how you can use it to unlock equity in your property.

1. What is Section 1031?

IRC Section 1031 allows for the deferral of capital gains taxes, depreciation recapture and certain other taxes on the sale of business or investment property if the sales proceeds are used to purchase a like-kind property.

A word of caution: 1031 exchanges defer taxes, they don't eliminate them. Taxes become due if you sell without doing another exchange.

But deferring lets you reinvest the full proceeds, trade up or diversify, and adjust your holdings as your needs change, without losing your hard-earned gains to taxes.

2. What kinds of properties qualify for Section 1031?

A common myth is that "like-kind" means exchanging the same type of property — such as a single-family home for another single-family home. In reality, like-kind actually refers to the property's kind or class, not the grade or quality.

Land can be exchanged for a restaurant, a rental home, a share in commercial property via a Delaware Statutory Trust (DST), even timberland. The possibilities are extensive.

Even mixed-use properties such as farmland, vacation homes or former primary residences with rental use might qualify for partial deferral with the help of a skilled tax adviser.

The key is to have an adviser who understands the IRS rules regarding use, intent and the property holding period. With the right advice and structuring, you secure the key to unlocking the maximum proceeds for reinvestment.

3. Choosing the right 1031 structure

You don't have to trade properties at the same time or with the same party. While simultaneous exchanges are possible, they're rare.

Most people use a deferred exchange, selling the relinquished property to an unrelated buyer and having the proceeds held by a qualified intermediary (QI) until they're used to buy one or more replacement properties from unrelated sellers.

Sometimes the replacement property must close before the relinquished one is sold, or it needs improvements to match the value.

Don't worry: Today's 1031 exchange rules include safe harbor guidelines for structuring reverse and build-to-suit exchanges to handle more complex scenarios.

4. The 1031 exchange timeline

The safe harbor guidelines dictate that when the relinquished property sale closes (meaning the benefits and burdens of ownership have transferred to the buyer), the exchange clock starts ticking.

You have 45 days to identify up to three replacement properties (or more, in some rare instances, if additional requirements are satisfied) and 180 days to acquire one or more of these identified properties. You can acquire as many of the identified properties as necessary.

To fully defer taxes, your replacement properties must equal or exceed the value of the one sold (minus qualified closing costs). If they're worth less, the exchange still works, but you'll owe tax on the difference, called "boot."

There is little wiggle room when it comes to the 1031 exchange timeline.

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In the absence of the announcement of a federally declared disaster to postpone certain tax deadlines, if you don't complete your exchange by day 180 (or the due date of your tax return if that comes before day 180 and you have not filed an extension), the exchange will fail.

It's important to seek tax and legal counsel with expertise specifically in 1031 exchanges to help avoid pitfalls.

5. Avoiding 1031 pitfalls

Working with 1031 clients, we see repeated mistakes, such as misinterpreting the 1031 exchange timeline.

Another is not listing enough backup properties. If your first choice falls through, you can't buy a property you didn't properly identify. It's always a good idea to identify alternative options so you can pivot should anything change.

Savvy exchangers often identify a DST as a backup, just in case. DST interests are packaged, so much of the due diligence has already been completed, and closings happen quickly.

The most fatal mistake in a 1031 exchange is taking actual or constructive receipt of the sale proceeds. To stay within safe harbor rules, a QI must hold the funds in a secure, dual-controlled account until used for the replacement property.

Though 1031 has been around for more than a century, QIs remain largely unregulated. Tragedies such as fraud and mismanagement have happened. To protect yourself, choose a QI who embraces industry best practices and engage them before your property sale closes.

6. Why now might be the perfect time for a like-kind exchange

With a volatile economy and uncertainty in the real estate market, how can you know if now is the time for an exchange? High interest rates and limited inventory could deter some from trading up, diversifying or seeking more passive income.

With the money you save from doing a 1031 exchange, now could be your moment.

You don't need a large property or portfolio to benefit from a 1031 exchange. With the right planning, even small property owners can defer taxes, build wealth, and leave more for their families.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jill Jones is General Counsel of Institutional Client Services USA for JTC Group. She is responsible for legal, governance, risk and compliance activities in the U.S. and oversees the Specialty Financial Administration wing, which includes EB-5 administration, 1031 exchange and Delaware statutory trust services. With over 20 years of corporate and compliance experience and having been directly involved in over 600 EB-5 development projects, Jill is uniquely skilled at efficiently structuring subscription escrows and is highly regarded as a thought leader throughout the EB-5 market sector.