Can You 1031 Exchange Forever?

Posted Jun 15, 2023

house-no-sale-IS-1205849558 (1)

A 1031 exchange is a great vehicle for deferring gains on the sale of a property. The tax bill can be quite burdensome if the property being sold has appreciated markedly. Investors can potentially get around this problem by utilizing a 1031 exchange, pushing their taxes due on the gain out into the future.

But at some point, does the tax man come knocking? Or can you just keep executing a 1031 exchange forever?

The Unlimited 1031 Exchange

An investor who executes a 1031 exchange and retains the replacement property indefinitely (i.e., until death) will never have to pay taxes on the relinquished property. This is different from what’s being asked in the article title, of course.

Let’s say the same investor wants to execute their second 1031 exchange. What will happen to the gain in this case? The original deferred gain continues to be deferred. Any new gain resulting from the second 1031 exchange is also deferred. So, the investor is still in good shape regarding deferring taxes on the two relinquished properties (from both exchanges).

If the investor executes a third 1031 exchange and then just continues executing a 1031 exchange, the mechanics are the same as in the previous example. Capital gain taxes will also continue being deferred into the future.

If the investor never sells their replacement property, they will not owe any taxes through these exchanges. Only when the replacement property is sold outright will they owe taxes.

Do Heirs Have to Pay Accumulated Gains?

Heirs receive a stepped up basis on inherited property. This means when property is inherited, its basis is marked to the market value at the time of inheritance. Because the property’s basis is the same as the market value, there are no gains and, thus, no taxes.

If an heir decides to 1031 exchange the inherited property (i.e., the relinquished property), they can. Additionally, the heir can continue deferring gains through a 1031 exchange, starting the chain all over.

Risk Associated with Multiple 1031 Exchanges

There are many moving parts to successfully completing a 1031 exchange. It isn’t so much that the process is complicated but more that it is very tedious. The IRS imposes deadlines and strict rules that must be followed throughout the 1031 exchange process. A misstep at any point can disqualify the 1031 exchange.

Once you’ve completed a 1031 exchange, you’ve successfully jumped through all the hoops and have a batting average of 100%. But that’s only one at-bat. Of course, the more times you go up to bat, the more your chance of missing. And so it goes with potential missteps in 1031 exchanges.

The more times you execute a 1031 exchange, the more chances for something to go wrong. Being very diligent will certainly weigh in your favor, but there is always the possibility that something could fall out of line. However, even if that happens, with a good team (i.e., realtor, QI, attorney), you may still be able to salvage the 1031.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

Download The Guide To 1031 Exchange

The 1031 Investor's Guidebook
Download eBook


The 1031 Investor's Guidebook

Download The Guide To 1031 Exchange

Tackle the art and science of completing your 1031 exchange.

By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received.