A 1031 exchange lets a US investment-property owner sell and roll the proceeds into another investment property while deferring the capital gains tax a plain sale would trigger. The mechanics are strict: a qualified intermediary must hold the funds, replacement property must be identified within 45 days, and the purchase must close within 180. Miss a deadline and the deferral dies retroactively.
Taxable boot=Net sale proceeds − Amount reinvested
- Net sale proceeds
- The sale price less closing costs and the debt paid off at closing.
- Amount reinvested
- The price of the replacement property, including debt taken on to buy it.
- Full deferral
- Requires a replacement property costing at least what the sold one did, with every dollar of net proceeds reinvested.
- A deferral, not a forgiveness. The basis carries over and the tax follows the chain until a sale breaks it.
- It says nothing about whether the replacement property is a good buy. The clock rewards speed, and speed is where bad purchases enter.
- The deadlines are the mechanism: 45 days to identify, 180 days to close, both counted from the closing of the sale.
- The structure has to be in place before the sale closes. Afterward there is nothing left to fix.
A sale closing on September 1 that nets $1.4M, rolled into a smaller building.
Two dates and one subtraction decide whether the deferral survives. None of the three can be fixed after the closing.
Tax mechanics change and individual situations differ. Treat this as orientation, not tax advice; the numbers on a specific transaction belong with a CPA or qualified intermediary.
Related terms
All termsFIRPTA (Foreign Investment in Real Property Tax Act)
FIRPTA is the US federal rule that makes the buyer withhold a slice of the sales price, generally 15%, when the seller of US real estate is a foreign person, and send it to the IRS as a deposit against the seller's tax.
FinanceCash Flow
Cash flow is what actually lands in the owner's pocket in a period: net operating income minus the mortgage payment and minus the capital dollars the building consumed.
InvestmentCap Rate (Capitalization Rate)
The capitalization rate is a building's net operating income divided by its price, expressed as a percentage.
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