1031 Exchange

A 1031 exchange allows an investor to sell a property, reinvest the proceeds from the sale in a “like-kind” property that is of equal or greater value, and defer all capital gain taxes. “Like-kind” means replacing one type of investment property with a similar type of investment property, like selling multifamily property and buying another investment property, such as another multi-family property or retail property, office, warehouse, land, or any form of real estate held for investment purposes.

1031 exchanges must follow strict time guidelines. Under normal conditions, sellers can defer paying capital gains taxes on the sale of a property if, within 45 days of closing, they identify a replacement property and are able to close on that property within 180 days from the original sale. Due to COVID-19, the IRS is giving real estate investors working toward 1031 exchanges extra time. The new IRS guidance extends both the 45-day and 180-day deadlines to July 15, 2020, if those deadlines would have expired on or after April 1, 2020. The extensions cannot apply to exchanges whose original property identification or closing deadlines are after July 15.

Commercial real estate has come to a screeching halt and lending requirements are stricter. Inspections are almost impossible since residents of apartments are sheltering in place and office space and retail are closed. Buyers are challenged in finding good replacement property since many sellers have removed their property from the market.

1031 exchange defers taxes but does not eliminate taxes. The 1031 is a tool to let you go from the property you own today to the property you want tomorrow.