Business Management

4 Rules of 1031 Exchanges Every Investor Should Know

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
162 Articles Written
close up view of upper level windows and roofs on four row homes

Let’s say you’ve got yourself a rental property and you've worked hard to get rents up and keep expenses low. The property is profitable, and you are looking to trade up by selling it and buying a more expensive property. The problem is that if you sell, you will have to pay capital gains tax on the sale as you would with a fix and flip or wholesale deal. That tax could be a heavy hit if you have sold the property for a gain, and it will stunt your growth as an investor. What can you do?

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That’s where a 1031 exchange comes in. A 1031 is a vehicle through which you can sell rental real estate and roll all the gains into a new purchase. Sound good? In today’s video, I go into detail on the rules of 1031s.

Related: 2 Make-or-Break Rules to Follow for a Successful 1031 Exchange

4 Rules of a 1031 Exchange

Here are the highlights:

  1. It must be a qualified transaction, meaning the property you sell must be held for investment intent. You have to hold it for passive income, not capital gain. In other words, fix and flips don’t qualify.
  2. The property you sell and the one you buy must be held by the same owner. This means you can't sell a property held in your personal name and buy one through an LLC. Watch the video for an idea how to get around this one!
  3. Once you sell, you have 45 days to identify potential new purchases and 180 days to actually close on the transaction.
  4. There are no extensions, meaning if you don’t close that new purchase 180 days after you sell, you have to pay tax on the gain. No exceptions.

In the video, I go over some tricks of the trade I learned with 1031 exchanges and tell some stories of my experiences with them.

Be sure to watch, and please leave a comment so we can get some chatter going!

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Patrick Fales Rental Property Investor from Buckeye, AZ
    Replied over 2 years ago
    That’s a good question from James that I am curious to know the answer too. Along the same lines are you able to pocket any of your equity? I see taxes being due on the $115K in Matt’s example if you don’t buy another investment but it makes no sense why the IRS would require the $200K to go into the next investment.
    Tipu Naqvi
    Replied over 2 years ago
    I read your full article and find something special and i appreciate for this. Thanks for sharing it and again i thnks you!
    Moty Wall from Cincinnati, Ohio
    Replied over 2 years ago
    Hi Matt, Thanks for your great presentation. I still have a question which I want to clarify using an example with the following assumptions: 1. Investment property was purchased for $100,000, paying 30,000 down and 70,000 from a lender. 2. Property for sale 2 years later for $200,000. 3. Assuming $20,000 for closing and 1031 exchange costs, the capital gains are $80,000. The question is – what is the minimum amount which one must use for the new property: A. $80,000 and up? (profit or the capital gains) B. $30,000 + $80,000= $110,000 (Down payment + profit)? C. $180,000 (Selling price less selling costs)? Thanks
    Dan Redmond
    Replied over 2 years ago
    Moty, We are in the middle of our first 1031 so are by no means experts, but our current understanding is that there is no minimum for using the proceeds. That said, all of the upside from the original deal including the prior mortgage is taxable if not used. In your case, if I read your situation correctly, to avoid furture capital gains you would need to invest the 100K profit and the 70K loan in a new property, your original down does not come into play. Hope I am correct and hope this helps. If wrong I will stand corrected. Good luck. I would speak with your tax advisor and a 1031 intermidery to confirm.
    Suzanne F Taylor
    Replied over 2 years ago
    I am planning to sell a rental condo I purchased for investment purposes when single. I want to use the proceeds in a 1030X to buy into a rental my new husband has owned with a business partner. The partner wants to sell his half of the rental to me. Can I buy the partner’s half or does it void the “taking title” rule you mention in your terrific video. Thanks.
    Jim Maxwell Investor from Shawnee Mission, Kansas
    Replied over 2 years ago
    I am starting the process of selling a 4-plex held in an LLC and want to do a 1031 exchange. We originally purchased the property in our personal names because we used conventional financing and the bank would not lend to an LLC. After the deal closed we deeded the property to our LLC. Your point about keeping the entity in the same name got me thinking. If we sell and get financing again I am curious how on a residential property (4-plex) we would get the bank to loan on the LLC? Should I get a commercial loan and then refinance to a residential loan? (I like the 30 year amortization, especially in a rising interest rate environment) That seems expensive. Looking for ideas.
    Huiping Sheng Homeowner from Tampa, FL
    Replied over 1 year ago
    Very clear and nice video! TIC be learned now. If a TIC(shopping mall+business also) will be sold and someone has 2% shares, can this individual owner have a 1031 exchange for the 2% will be distributed to buy an individual owner property, such as a small apt? This is a TIC to individual process. Thanks. Huiping
    Farrukh Madaminov Rental Property Investor from Jersey City, NJ
    Replied over 1 year ago
    I’m interested in the following questions that never got an answer: What if you wanted to take the capital gains from a investment property (title held personally) and put it into a syndication as a passive investor? Could you contribute the cap gains to the LLC and have that LLC be the member of the syndication multi-member syndication?