Key Things Every Real Estate Investor Should Know About a 1031 Exchange

Key Things Every Real Estate Investor Should Know About a 1031 Exchange

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If you’re a real estate investor looking to maximize your capital gains for expanding your portfolio,a 1031 exchange is something you should definitely utilize. With the help of a 1031 exchange company, this type of real estate transaction enables you to trade up your investment properties by allowing you to use the entire proceeds from a property sale for financing other, potentially more valuable real estate investments.

But before you can use a 1031 exchange, you should fully understand how it works and why it is so useful for real estate investors. This article will shed light on key features of the transaction process that every real estate investor should be familiar with.

What is a 1031 Exchange?

A 1031 exchange is a tax-deferred exchange or transaction that allows real estate investors to use the entire amount from the sale of property to be used for financing other ‘like-kind’ properties. The term derives from Section 1031 of the IRS (Internal Revenue Service) code which allows deferral of capital gains tax from the sale of property, on condition that the proceeds are used for purchasing a replacement investment property within a set time period.

Why is a 1031 Beneficial For Real Estate Investors?

Tax charged on capital gains from sale of property can be very high. For instance, short-term capital gains tax on the sale of a property less than a year in your possession can be as high as 37%, while long-term capital gains for properties you’ve owned for more than a year can range anywhere between 15% to 20%. With the help of a 1031 exchange accommodators California, a 1031 exchange allows you to defer these capital gains taxes and use the entire proceeds from the property sale to buy replacement properties, ideally that are higher in value.

What are ‘Like-Kind’ Properties?

It is important to pay attention to the type of the properties to be sold and bought for a 1031 exchange because the tax code specifically states that the properties in question should be ‘like-kind’. According to the definition provided by the IRS, real estate properties are ‘like-kind’ if they are of the same nature or character even if there is a difference in grade or quality.

What Type of Properties Are Eligible For a 1031 Exchange?

Apart from being ‘like-kind’, the real estate properties for using a 1031 exchange need to meet certain criteria. Any property that has a productive use in a trade or business, or is held for an investment purpose qualifies for a 1031 exchange. This means that any property that serves as a primary residence whether it’s a single-family home, multi-family home, condominium, or any other type of home, does not qualify for a 1031 exchange.

How is a 1031 Exchange Done?

To perform a 1031 exchange, the proceeds from the property sale must be transferred to a qualified intermediary, a 1031 exchange expert who will hold the fund in escrow and transfer it to the seller of your replacement. When closing for the sale of the relinquished property and purchase of the replacement property is done, everything should be informed to the IRS disclosing all the parties, timeline, and amount of money involved.


With the ability to defer tax on the sale of your property, a 1031 exchange allows you to maximize your capital gains and use it for trading up your investment properties. For a process so simple, it is very advantageous for real estate investors to grow and expand their investment.

When utilizing a 1031 exchange, It is very important to choose a credible, competent, and trustworthy QI so that you don’t lose money, miss deadlines, or end up in a situation where you need to pay taxes now and not later. Granite Exchange Service is a trusted, certified exchange specialists who can help you through the entire process. Contact us so that you use a 1031 exchange successfully.



We are proud to have long-standing relationships with the intermediary community and have a designated team supporting relationships with escrow officers, lawyers, accountants, tax advisors, investment consultants and corporate finance professionals.