1031 Exchange Basics for Rental Property Owners

Whether you’re selling your first rental or planning a strategic property swap, a 1031 exchange can be one of the most powerful tools to help you defer taxes and reinvest your profits—keeping your money working for you.

If you’re not sure what qualifies or how the rules work, don’t worry. This guide will walk you through the basics in simple terms, so you understand what to expect before you sell.

 A 1031 exchange (named after Section 1031 of the Internal Revenue Code) allows you to sell one investment property and purchase another—without paying capital gains tax right away.

Instead of paying taxes on your profit, you reinvest those funds into a new property of equal or greater value. The tax is deferred until you eventually sell without reinvesting.

This means you can grow your portfolio faster by keeping more of your equity in play.

Before you start the process, there are a few key requirements:

• Investment Use – Both properties must be held for business or investment purposes (not your personal residence).
   
• Like-Kind Property – “Like-kind” doesn’t mean identical. You can exchange a single-family rental for a duplex, land for an apartment, or a commercial building for another commercial space.
   
• Qualified Intermediary – You cannot receive or hold the sale proceeds yourself. A qualified intermediary (QI) must handle the funds until your new purchase is complete.
   

The IRS is strict about deadlines, so planning is key:

• 45-Day Rule – After selling your property, you have 45 days to identify potential replacement properties in writing.
   
• 180-Day Rule – You must close on the new property within 180 days of the original sale.
   

Both time periods start the day your first property closes. Missing a deadline can disqualify the entire exchange—so coordination is crucial.

Even in a properly structured 1031 exchange, not every part of the transaction may qualify for full tax deferral. Any money or value you receive that isn’t part of the like-kind property is called boot—and boot is taxable.

Here’s how it can show up:

• Cash Boot – If you receive cash back from the sale or from leftover funds after closing, that amount is taxable.
   
• Debt Relief Boot – If your new property has less debt than the one you sold, the difference is considered taxable boot (even if you don’t receive cash).
   
• Non-Qualifying Property – If personal items (like appliances or furniture) are included in the exchange, their value is also treated as boot.
   

Example:
You sell a rental property for $800,000 and buy another for $750,000. The $50,000 difference is taxable boot because it wasn’t reinvested in a like-kind property.
 

In short: To fully defer taxes, reinvest all proceeds and replace equal or greater debt.

To help your 1031 exchange go smoothly, you’ll want to keep these details organized:

• Sale price of the property you’re selling
   
• Outstanding loan balance at the time of sale
   
• Purchase price and loan amount of the new property
   
• Copies of closing statements (HUD-1 or settlement statements)
   
• Qualified intermediary contact information and exchange agreement
   

Having this information ready allows your CPA to confirm that your exchange meets IRS requirements and helps identify any taxable portions early.

A 1031 exchange can be one of the smartest moves for long-term investors. It’s a way to grow your portfolio, build equity faster, and keep more of your profits working for you—as long as it’s done correctly.

If you’re considering selling a rental property, let’s connect before you close. Together, we’ll review your numbers, structure your exchange properly, and make sure no opportunities for tax savings are left on the table.

 This information is for educational purposes only and should not be interpreted as tax advice. Each situation is unique—consult with a qualified CPA before initiating a 1031 exchange.