1031 Exchange Rules 2026: A Simple Guide for Investors
Are you an investor thinking about making a 1031 exchange? Learn how to improve your position in the market and boost your cash flow.
Why Pay Taxes When You Can Defer?
Selling an investment property is not always easy. In fact, this process can come with massive tax bills, transaction costs, and more, often discouraging investors from making the move. However, a 1031 exchange can be a more beneficial and fruitful path to explore for those looking to improve capital.
What Is a 1031 Exchange?
This government-sanctioned wealth-building tool essentially allows you to swap one investment property for another, enabling you to defer 1031 exchange capital-gains taxes.
While 1031 exchange rules can be complex, working with the right partner, like CapFree Xchange, can make the process simple, safe, and accessible.
Not sure how much you owe? Use our free Real Estate Investment Calculator to get a glimpse of your potential savings.
1031 Exchange for Dummies: How It Works (Simplified)
In the eyes of the IRS, a 1031 exchange, also known as a like-kind exchange, is a swap—not a sale. This distinction is what allows you to keep 100% of your equity working for you, rather than having to immediately pay a large percentage of the sale (typically 30-40%) in taxes.
What to Keep in Mind
When making an exchange, there are strict 1031 exchange requirements and rules you must adhere to. Learn about the 1031 exchange process and the mechanics at play.
- The Relinquished Property: Sell your current property and transfer all funds through a 1031 exchange qualified intermediary (QI).
- The Replacement Property: Identity a replacement property, like a net lease single-family home through CapFree Xchange.
- The Timing: Identification must be completed within 45 days and closing of the new property must be within 180 days to meet the 1031 exchange rules.
CapFree Xchange helps you handle all of these mechanics and more with ease, enabling you to more quickly and efficiently meet your goals.
Core 1031 Exchange Rules & Requirements
Think this might be the right path for you? Learn more about 1031 exchange rules and 1031 exchange requirements.
Rule 1: Like-Kind Property
While 1031 exchange rules are strict, you do have some wiggle room when it comes to your property exchange. A “like-kind” swap refers to the nature of the activity, so typically any property used for business or as an investment will qualify. But what exactly does that mean for your own exchange? Well, you can exchange a duplex for a single-family rental (SFR), exchange a SFR for a commercial building, and more.
Rule 2: The Same Taxpayer
This one’s simple—the name on the selling title must match the title on the new property to ensure you’re the same one taking ownership.
Rule 3: Value & Equity
To defer 100% of your taxes and meet 1031 exchange requirements, you must buy a property of equal or greater value to the one you are selling. Then, you must reinvest all cash proceeds into the new property as well. Have cash left over even after the exchange is complete? That would be taxable, so this is something you want to avoid.
We’re here to help. CapFree Xchange properties are priced to match these specific equity requirements down to the penny, so you don’t have to stress about finding the right investment.
Rule 4: The Holding Period
While the IRS doesn’t set a specific holding period for 1031 exchange, it is typically a good idea to hold the property for at least two years.
The Timeline: The 45-Day & 180-Day Clocks
Unlike with the holding period, there is a strict 1031 exchange time limit. Learn how to adhere to a set of specific 1031 guidelines.
What to Keep in Mind
It’s important to note that 1031 exchange deadlines and rules are absolute, without any room for extensions or exceptions.
1. The Identification Period – 45 Days
Wondering how long you have to find a replacement property? The 1031 exchange 45-day rule states that you must identify your potential replacement properties in writing within 45 days of closing your sale on the original property.
While many exchanges fail due to a lack of availability, CapFree Xchange’s “available now” model gives you instant access to an inventory of 1031-eligible net lease single-family rentals, streamlining the process, helping you meet this deadline—and setting you up for success.
2. The Exchange Period – 180 Days
There are also 1031 exchange rules surrounding the actual exchange. Once you’ve decided on and identified a new property, you must complete the purchase within 180 days of closing on the original property.
How to Do a 1031 Exchange: The Process Step-by-Step
Ready to get started? Learn how to do a 1031 exchange and get additional insights on 1031 exchange requirements.
- Step 1) Hire a Pro: To start the 1031 exchange process, you must hire a third-party 1031 exchange qualified intermediary to handle the funds. You cannot touch the money yourself or the sale will not qualify under Section 1031 and will become immediately taxable.
- Step 2) List & Sell: List your current property, take action to complete the sale, and transfer the proceeds to your 1031 exchange qualified intermediary.
- Step 3) Identify: Find your new headache-free rental property within the 45-day window.
- Step 4) Close: Your QI will transfer funds to the seller and you’ll get the deed.
- Step 5) File: Don’t forget to file a 1031 exchange form, IRS form 8824, to ensure you followed 1031 exchange rules properly and that you qualify for a tax deferral.
1031 Exchange Examples: Seeing the Math
Take a look at a couple 1031 exchange examples to see if this process is right for you—and learn how to get peace of mind with CapFree Xchange.
- Scenario A: An investor sells a rental for $500k and owes $200k in taxes. Going forward, they only walk away with $300k to invest and their purchasing power is greatly diminished.
- Scenario B: Instead, this investor reinvests the full $500k into a CapFree Xchange portfolio, maintaining their earning power and easily gaining passive income.
Pros, Cons, & Must-Knows
If you’re still on the fence about making a 1031 exchange, learn about a few of the pros and cons to help you make your decision.
Disadvantages
A 1031 exchange can be a great way to maximize your benefits. It allows you to defer 1031 exchange capital gains, facilitates better estate planning, and helps you build long-term wealth. However, strict timelines, the stress of finding the right property, and the complex 1031 exchange rules can make this process challenging.
At CapFree Xchange, we’re dedicated to helping eliminate some of these hurdles, making the journey easier by providing the immediate opportunity to exchange into headache-free rental properties and boost cash flow.
Avoidance Methods
When making a 1031 exchange, you’ll want to ensure you purchase the right amount of real estate and that you don’t have “boot” (compensation that is not included in
the like-kind exchange) to deal with, as this cash is taxable and not eligible for deferral.
Is it better to pay capital gains or do a 1031 exchange?
While the answer is highly dependent on your specific situation, it is almost always better to exchange if you’re looking to preserve wealth, as paying taxes upfront reduces your compounding principal.
FAQ: Common Investor Questions
What is the 5 year rule for 1031 exchange?
If you turn the investment property that you acquired through a 1031 exchange into your primary residence, there is a 5-year holding requirement before you’re able to use the homeowner tax exclusion under Section 121. You must also live in the home for two years.
What is the 95% rule for 1031 exchange?
Used as a guideline when identifying exchange properties, this rule states that you can name an unlimited amount of properties as long as you end up purchasing at least 95% of their total value. Since this is a tricky 1031 exchange requirement to meet, most investors opt to identify three properties instead.
What are the basic rules of a 1031 exchange?
- Like-Kind Exchange: You must swap a property used for business or as an investment for another one with the same purpose.
- Equal or Greater Value: You must reinvest in a property of the same or higher value to ensure you can fully defer your taxes.
- Tight Timeline: Don’t forget about important 1031 exchange deadlines. You must identify your replacement property within 45 days and complete the new purchase within 180 days of selling your old property.
The Simple Way to Exchange
While 1031 exchange requirements are strict, the outcome is powerful. Let Capfree Xchange get you on the path to a brighter future with our high-quality SFRs. We’ll identify replacement properties, oversee the sale, arrange the 1031 exchange, and absorb all landlord responsibilities. Invest and relax with predictable income free of all property tax, insurance, management, and more.
And don’t let the 45-day rule stress you out. Browse our current inventory of pre-vetted, income-producing homes perfect for your 1031 exchange and download our 1031 Exchange Whitepaper to learn more.
