Owner’s Guide Section 1031
How a 1031 exchange lets you defer capital gains taxes when you sell.
A 1031 exchange — named for Section 1031 of the Internal Revenue Code — allows a real estate investor to defer capital gains taxes and depreciation recapture by reinvesting sale proceeds into like-kind investment property through a qualified intermediary, subject to strict deadlines: 45 days to identify the replacement property and 180 days to close. Used well, it keeps your full equity compounding instead of surrendering a large slice to taxes at every sale.
§1 What You Are Deferring
The tax bill on a sale is usually bigger than owners expect.
When you sell an appreciated rental property outside of an exchange, three federal taxes typically apply:
- Capital gains tax on your appreciation — long-term rates of 15% or 20% for most sellers.
- Depreciation recapture at up to 25% on the depreciation you’ve taken over the years — often the surprise line item, since it applies even if you never noticed the deduction.
- Net investment income tax of 3.8% for higher-income taxpayers.
Florida has no state income tax, which helps — but for a long-held Central Florida property, the combined federal bill can still consume a quarter or more of your gain. A 1031 exchange defers all of it, moving your entire equity into the next investment.
§2 How It Works
The mechanics, in plain language.
What qualifies
Real property held for investment or business use exchanges for other real property held for investment or business use. “Like-kind” is broad in real estate: a fourplex can exchange into an apartment building, raw land, a warehouse, or a fractional TIC or DST interest. Your personal residence does not qualify.
The qualified intermediary
You cannot touch the sale proceeds. Before closing, you engage a qualified intermediary (QI) — an independent exchange company that receives the funds, holds them, and disburses them to purchase the replacement property. Receiving the money yourself, even briefly, disqualifies the exchange.
The deadlines
Both clocks start the day your sale closes and run concurrently. You have 45 days to identify replacement property in writing to your QI (commonly up to three candidate properties), and 180 days to close on one or more of them. The IRS enforces these strictly.
Value and debt rules
To defer the full gain, the replacement property must be of equal or greater value, you must reinvest all net proceeds, and you must replace any debt paid off at sale with new debt or added cash. Fall short on any of these and the difference — the “boot” — is generally taxable.
Deferral, not elimination
Your basis carries forward into the new property, and the deferred gain is recognized whenever you finally sell without exchanging. Many investors exchange repeatedly for decades; under current law, property passing at death may receive a stepped-up basis, which is why exchanges figure prominently in estate planning conversations. That is squarely a question for your CPA and estate attorney — we raise it only so you know to ask.
§3 Working With Ironwood
Selling to us can be the first leg of your exchange.
The riskiest part of most exchanges is the sale itself: a buyer who retrades or falls out of contract can wreck your 45/180-day planning. A direct sale to Ironwood gives you a firm written price and a closing date you can build the exchange around — and we’re accustomed to coordinating with qualified intermediaries and their documentation.
Does a 1031 exchange eliminate capital gains taxes?
No — it defers them. Your original basis carries into the replacement property, and the deferred gain is generally recognized when you eventually sell without exchanging. Many investors exchange repeatedly; under current law, heirs may receive a stepped-up basis at death, but that is an estate-planning question for your CPA and attorney.
What are the 1031 exchange deadlines?
From the day your sale closes, you have 45 calendar days to identify replacement property in writing and 180 calendar days to close on it. The deadlines run concurrently and are strictly enforced — there are no routine extensions.
What is a qualified intermediary and do I need one?
Yes, for a standard deferred exchange. A qualified intermediary (QI) is an independent party that holds your sale proceeds so you never take receipt of them — touching the money disqualifies the exchange. Engage the QI before your sale closes.
What is “boot” in a 1031 exchange?
Boot is any value you receive that isn’t like-kind property — cash left over, or debt relief not replaced on the new property. Boot is generally taxable in the year received, even if the rest of the exchange qualifies.
Does Florida tax my capital gains?
Florida has no state income tax, so Florida residents typically face only federal capital gains tax, depreciation recapture, and potentially the net investment income tax — which still commonly totals 20–30% or more of the gain. That is the number a 1031 exchange defers.
This information is educational and is not tax, legal, or investment advice. Every situation is different — consult your CPA and attorney before making any decision.
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