Education
What is a 1031 exchange?
A 1031 exchange is one of the most powerful tax-deferral tools available to real estate investors. Here is how it works — and how a Delaware Statutory Trust can serve as replacement property.
The Basics
Defer the tax, keep your equity working.
Named for Section 1031 of the Internal Revenue Code, a "1031 exchange" (or "like-kind exchange") lets an investor sell real property held for investment or business use and reinvest the proceeds into other like-kind real property — while deferring the federal capital gains tax that would otherwise be due on the sale.
By deferring that tax, an investor keeps more equity invested and compounding, rather than handing a portion to the IRS at each sale. Investors can repeat the process across multiple exchanges over a lifetime, potentially deferring tax indefinitely.
Since the 2017 Tax Cuts and Jobs Act, 1031 treatment applies only to real property held for investment or business use. Personal residences and personal property no longer qualify.
What can be deferred?
- Federal capital gains taxUp to 20% on long-term gains, depending on income.
- Depreciation recaptureTaxed at rates up to 25% absent an exchange.
- Net investment income taxAn additional 3.8% surtax for many investors.
- State capital gains taxVaries by state; can add several percentage points.
Rates are illustrative and depend on individual circumstances. Consult your own tax advisor.
The Timeline
Two deadlines drive every exchange.
Once you sell your relinquished property, the IRS clock starts. Missing either deadline can disqualify the exchange.
Sell the relinquished property
Proceeds must go to a Qualified Intermediary (QI) — never to you directly. Receiving or controlling the funds may disqualify the exchange.
Identify replacement property — within 45 days
You have 45 calendar days from the sale to formally identify potential replacement properties in writing, subject to IRS identification rules.
Close on replacement property — within 180 days
You must acquire the replacement property within 180 calendar days of the sale (or your tax-filing deadline, if earlier).
Defer the gain
To defer the full gain, reinvest all net proceeds and replace any debt that was paid off on the sale with equal or greater debt (or additional cash).
Defer indefinitely — or eliminate at death
You can repeat 1031 exchanges over a lifetime to keep deferring tax. Under current tax law, heirs may receive a step-up in cost basis at death, which can eliminate the deferred gain.
Rules of a fully tax-deferred exchange
- Like-kind real propertyBoth the relinquished and replacement property must be U.S. real property held for investment or productive use in a trade or business.
- Equal or greater valueTo fully defer gain, acquire replacement property with a purchase price equal to or greater than the sale price of the relinquished property.
- Reinvest all net equityAll net sale proceeds must be reinvested. Any cash received or retained ("cash boot") is generally taxable.
- Replace debt or contribute additional cashAny debt paid off on the relinquished property must be replaced with new debt and/or additional cash. A reduction in debt not offset by additional cash may result in taxable "mortgage boot."
- Same taxpayerThe taxpayer that sells the relinquished property must generally be the same taxpayer that acquires the replacement property.
- Use a qualified intermediaryThe exchanger cannot take actual or constructive receipt of the sale proceeds; a qualified intermediary must hold the funds during the exchange.
Deadline Calculator
Estimate your 1031 deadlines.
Enter your sale (closing) date to see your 45-day identification and 180-day closing deadlines.
Deadlines are calendar days from the sale date and may be shortened by your tax-filing deadline. Provided for estimation only — confirm with your Qualified Intermediary and tax advisor.
Identification Rules
How many properties can you identify?
3-Property Rule
Identify up to three properties of any value, and you may acquire one, two, or all three.
200% Rule
Identify any number of properties, as long as their combined value does not exceed 200% of the relinquished property's sale price.
95% Rule
Identify any number of properties of any value, provided you acquire at least 95% of the total value identified.
Who It's For
Is a 1031 exchange right for you?
A 1031 exchange is most relevant to investors who hold appreciated real estate and want to keep their equity working without a tax bill at sale.
Discuss your situation- You own appreciated investment real estateProperty held for investment or business use that has increased in value and may generate taxable gain upon sale.
- You face a meaningful tax liability upon salePotential exposure to capital gains taxes, depreciation recapture, and applicable state taxes.
- You want to remain invested in real estateA 1031 exchange allows you to defer taxes and reinvest more of your equity into replacement property.
- You want to preserve and compound equityDeferring taxes can allow more capital to remain invested and potentially generate future returns.
Where DSTs Fit
A Delaware Statutory Trust can be a replacement property.
Finding, financing, and closing on suitable replacement property within the exchange deadlines can be one of the most challenging aspects of a 1031 exchange. A Delaware Statutory Trust (DST) offers access to professionally managed real estate that can be identified and acquired quickly, and beneficial interests in properly structured DSTs generally qualify as like-kind replacement property under IRS Revenue Ruling 2004-86.
Many investors also identify a DST as a backup replacement property — providing an additional option to help preserve exchange flexibility if a primary acquisition is delayed or does not close.
Learn how DSTs workDST investments are speculative and involve risk, including the possible loss of principal. Review Risks & Considerations before investing.
Why investors pair a 1031 exchange with a DST
- Speed & efficiencyDST offerings are typically pre-structured and can often be acquired within exchange deadlines.
- Passive ownershipExchange active property-management responsibilities for professionally managed real estate.
- Institutional-quality real estateGain access to larger, professionally managed assets that may be difficult to acquire individually.
- Precise equity placementDST interests can often be purchased in increments that allow investors to more closely match their exchange proceeds and reduce the risk of taxable boot.
See a live 1031-eligible offering.
Review NEWSTAR Exchange's current Delaware Statutory Trust offering, available to accredited investors.
View Current OfferingImportant Disclosures
This page is provided for general educational purposes only and does not constitute tax, legal, or investment advice. The rules governing 1031 exchanges are complex and subject to change; you should consult your own qualified tax and legal advisors regarding your specific situation. NEWSTAR Exchange does not provide tax or legal advice.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. Offerings are made only to accredited investors by means of a Private Placement Memorandum. Securities offered through Preferred Capital Securities, LLC, member FINRA/SIPC.