Within the world of commercial real estate, a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred.  As you can imagine, the term gets its name from IRS code Section 1031.  It gets thrown around and by every type of real estate investor and, in reality, it’s a pretty simple concept:  Roll one piece of commercial real estate to another and postpone paying capital gains taxes. 

That said, IRS Section 1031 has many moving parts that real estate investors must understand before attempting its use. An exchange can only be made with like-kind properties. There are also tax implications and time frames that may be problematic. Still, if you’re considering a 1031, or are just curious, here is what you should know about the rules.

The 45-Day Rule 

The first relates to the designation of a replacement property. Once the sale of your property occurs, the intermediary will receive the cash. You can’t receive the cash, or it will spoil the 1031 treatment. You will use an intermediary called a Qualified Intermediary (QI).  Also, within 45 days of the sale of your property, you must designate the replacement property in writing to the intermediary, specifying the property you want to acquire.  The IRS says you can designate three properties so long as you eventually close on one of them. You can even designate more than three if they fall within certain valuation tests.

The 180-Day Rule

The second timing rule in a delayed exchange relates to closing. You must close on the new property within 180 days of the sale of the old.