Property investors who want to sell their real estate investment should consider whether they can minimize their capital gains tax obligation.
Many property owners find their solution in the 1031 Exchange, which is an IRS-permitted tax-deferred strategy that allows investors to reinvest proceeds from the sale of investment properties into new “like-kind” properties without immediate tax liability.
There are multiple methods to execute this strategy. The following guide explains multiple types of 1031 exchanges together with their operational methods so you can find the best approach for your investment objectives.
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Delayed 1031 Exchange (Most Common)
A Delayed 1031 Exchange represents the most frequently implemented structure. You must begin by selling your property before you can identify replacement properties that you need to acquire before the stated time limitations:
- You have 45 days from the date of the sale to identify potential replacement properties.
- You must finalize the replacement property purchase within 180 days or by the due date of their tax return (including extensions), whichever is earlier.
- To meet IRS regulations, your Qualified Intermediary (QI) must hold the sale proceeds throughout this period.
Best For: The majority of investment property owners who need a tax-deferred exchange solution.
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Simultaneous 1031 Exchange
A Simultaneous 1031 Exchange occurs when you transfer ownership of your relinquished property on the same day—with no gap in ownership transfer.
The current market conditions make it challenging to execute this exchange structure because a single delay would risk the entire exchange process. A delayed exchange structure has become most investors' preferred choice since it provides time for due diligence, financing, and scheduling.
Best For: Special cases that require advance scheduling of property transfers and internal property movements.
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Reverse 1031 Exchange
Want to buy before you sell? The Reverse 1031 Exchange process starts by letting you purchase your replacement property before selling your current property, which must take place within 180 days.
The Exchange Accommodation Titleholder (EAT) holds the title to one of the assets because the exchange period prevents simultaneous ownership of both properties.
Best For: Investors operating in competitive market conditions or possessing their target replacement property.
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Improvement (Construction) 1031 Exchange
With an Improvement 1031 Exchange, you can utilize exchange funds to improve or construct the replacement property while enhancing its worth to match your investment objectives.
The replacement property must have land value and improvement value totaling at least as much as the original property sold during the 180 days.
Best For: Real estate investors who focus on adding value to properties through renovations or development initiatives.
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1031 Exchange Into a Delaware Statutory Trust (DST)
Through a DST, you can acquire fractional beneficial ownership of institutional-grade commercial properties such as multifamily, industrial, or retail assets while avoiding active property management responsibilities.
The IRS recognizes DSTs as "like-kind" assets, enabling investors to use them as a tool to delay tax obligations and establish potential passive income streams.
Best For: Property owners entering retirement or seeking passive income want to diversify their assets while minimizing management responsibilities.
How Realized Can Help
Our team at Realized assists property owners in executing all types of 1031 exchanges while focusing mainly on DSTs that create passive, diversified portfolios. Realized implements Investment Property Wealth Management to develop financial plans that match your budget requirements alongside your tax requirements and investment timeline.
Are you prepared to examine your 1031 Exchange possibilities?
Our team can help you evaluate strategies aligned with your investment objectives and provide guidance on structuring a tax-deferred exchange that supports your broader financial planning goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
