In commercial real estate, a 1031 Exchange—named after Section 1031 of the Internal Revenue Code—allows investors to defer paying capital gains taxes when they sell a property, as long as they reinvest the proceeds into a similar, or “like-kind,” property. This tool is especially valuable for investors seeking to grow their portfolio or reallocate assets without triggering an immediate tax liability. The like-kind requirement is broad, meaning an office building, warehouse, retail space, or even undeveloped land can typically be exchanged for another type of commercial property, as long as both are held for investment or productive use in a trade or business.
To complete a 1031 Exchange, the investor must follow specific rules and timelines. First, they must identify potential replacement properties within 45 days of selling the original property. Then, the purchase of the new property must be completed within 180 days of the sale. Importantly, the investor cannot directly receive the sale proceeds; instead, a qualified intermediary holds the funds and facilitates the transaction. If any cash (or “boot”) is received as part of the exchange, that amount is subject to taxes.
1031 Exchanges can be strategic tools for long-term wealth building. They enable investors to move into properties with better cash flow potential, consolidate or diversify their holdings, or shift into markets with more favorable growth trends—all while deferring taxes that would otherwise reduce their investment capital. However, these transactions can be complex and require careful planning.
Dr. Nicole Wadsworth of Jones Wadsworth Commercial Real Estate brings unparalleled expertise to guiding clients—including those executing 1031 Exchanges—through every stage of commercial real estate transactions.
Always consult with your accountant or tax attorney beforehand to ensure a 1031 exchange is suitable for your unique tax situation.
