1031 Exchange Explained

What is a 1031 Exchange?

A 1031 Exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows real estate investors to defer paying capital gains taxes when they sell one investment property and reinvest the proceeds into another "like-kind" property.

The idea is simple: by reinvesting into a similar type of real estate, you can postpone your tax bill, preserve equity, and continue to grow your portfolio. This strategy is commonly used for rental properties, commercial buildings, and land—not for primary residences or second homes.

🔑 Key Components of a 1031 Exchange

1. Like-Kind Property

In a 1031 Exchange, both the sold and replacement properties must be investment or business-use real estate. “Like-kind” doesn’t mean identical—it simply means they’re both used for investment purposes. For example, you could exchange a rental condo in Cambridge for a three-family in Lynn.

2. Timeline Rules

There are two strict deadlines:

You must identify potential replacement properties within 45 days of selling your current property.

You must close on one (or more) of those properties within 180 days of the sale.

These timeframes are non-negotiable, and missing them disqualifies the exchange.

3. Use of a Qualified Intermediary

A Qualified Intermediary (QI) must handle the proceeds from the sale—you cannot touch the funds directly. The QI holds the money and facilitates the exchange, ensuring IRS compliance. Many Massachusetts investors work with attorneys or 1031 specialists to fill this role.

4. Full Reinvestment = Full Deferral

To defer all capital gains taxes, you must reinvest 100% of the sale proceeds into a replacement property of equal or greater value. If you take cash out (called “boot”), you may owe taxes on that portion.

💡 Why a 1031 Exchange Matters

In high-cost areas like Greater Boston and North Shore, where property values have appreciated significantly, a 1031 Exchange can save investors tens—or even hundreds—of thousands of dollars in capital gains taxes.

Whether you're consolidating assets, diversifying into new markets, or increasing cash flow, a 1031 Exchange offers flexibility, tax efficiency, and long-term wealth-building potential. It's also a common strategy for multigenerational wealth transfer and retirement planning.

For both buyers and sellers in a transaction involving a 1031 Exchange, understanding the process upfront ensures smoother negotiations and fewer surprises at closing.