What Is a 1031 Exchange?
A 1031 exchange allows real estate investors to defer federal capital gains taxes when selling an investment property, provided the proceeds are reinvested into a "like-kind" replacement property. The tax is not eliminated; it is deferred until the replacement property is eventually sold (unless another 1031 exchange is completed at that time).
The exchange is named after Section 1031 of the Internal Revenue Code. Only investment or business-use properties qualify. Your primary residence does not.
1031 Exchange Requirements
- Like-kind property — The replacement property must be real estate held for investment or business use. "Like-kind" is broadly interpreted; you can exchange a rental house for a commercial building, vacant land for an apartment complex, etc.
- Equal or greater value — To fully defer all taxes, the replacement property must be equal to or greater in value than the relinquished property, and all cash proceeds must be reinvested.
- Qualified intermediary (QI) — The exchange must be facilitated by a qualified intermediary who holds the proceeds between the sale and the purchase. The investor cannot touch the money.
- 45-day identification period — The investor has 45 calendar days from the sale of the relinquished property to identify potential replacement properties in writing.
- 180-day closing deadline — The investor must close on the replacement property within 180 calendar days of selling the relinquished property.
Florida-Specific Considerations
Florida does not have a state income tax, so the 1031 exchange primarily defers federal capital gains tax (currently 15% to 20% depending on income bracket) and the 3.8% Net Investment Income Tax (NIIT). However, if the relinquished property is in a state with income tax and the replacement is in Florida, the exchange can also eliminate the state tax permanently.
Florida's escrow and closing procedures work well with 1031 exchanges because the title company can coordinate directly with the qualified intermediary to ensure proceeds are properly handled.
Common Mistakes
- Missing the 45-day identification deadline (no extensions, even for weekends)
- Taking constructive receipt of the proceeds (touching the money before reinvestment)
- Exchanging into a property the investor intends to use as a primary residence immediately
- Not using a qualified intermediary (a title company or attorney alone does not satisfy the requirement)
Related Terms
- Escrow — QI holds exchange funds in escrow
- Closing Disclosure — Shows exchange-related disbursements
- Warranty Deed — Used to transfer both relinquished and replacement properties
Barnes Walker 1031 Exchange Coordination
Barnes Walker Title coordinates 1031 exchange closings with qualified intermediaries, ensuring proper documentation and timing. Submit a title inquiry for assistance.